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Municipal Bonds > Municipal Bonds > Flashcards

Municipal Bonds Flashcards

1
Q

At what level(s) are interest payments municipal securities taxed? think of tax benefits

A

Typically only taxed at state and local levels and exempt from federal taxation due to the Doctrine in 1895. Remember that capital gains (as opposed to interest pmts) are not tax exempt the same way

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2
Q

Interest rates paid on municipal securities are generally (higher/lower) than those paid on corporate bonds?

A

Lower due to tax status

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3
Q

Tax-free munis are more suitable for which type of investor: one in a higher or lower tax bracket?

A

Higher tax bracket - wont have to pay as much in taxes

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4
Q

Maturities on municipal notes or bonds can range from what to what?

A

less than a year to over 30 years

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5
Q

What are the 2 types of municipal BONDS?

A
  1. General Obligation (GO) Bonds

2. Revenue Bonds

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6
Q

What are GO Bonds backed by? Revenue Bonds?

A

GO Bonds are backed by the full faith, credit, and taxing powers of the municipality. Revenue bonds are backed by the revenue generated from the project within the municipality.

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7
Q

What are the sources of funding to pay interest and principal on GO Bonds? AKA how does a municipality that issues GO Bonds for capital improvements pay the bondholders back?

A

Since GO Bonds dont go toward funding revenue-generating projects, rather capital improvements that benefit the community, principal and interest is paid through income taxes, license fees, and sales tax (if state-issued) and property (ad valorem) taxes and license fees (if city-issued)

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8
Q

T/F: GO Bonds are subject to statutory debt limits but revenue bonds are not.

A

True: to protect taxpayers from overleveraging

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9
Q

T/F: Trust Indentures are required for municipal bonds.

A

False, Trust Indentures are not required but enhance the marketability of the security

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10
Q

What’s the difference between a municipal bond and note?

A

length of maturity. Notes are short term (less than 12 mo) securities for municipalities expecting revenues soon. Most are “____ anticipation notes” ie Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes, etc.

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11
Q

Recall that the types of Revenue Bonds depend on the type of ___ the bond issue finances.

A

Facility. I.E. Industrial Development Revenue Bonds or Lease Rental Bonds.

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12
Q

What type of Revenue Bond is used to construct facilities or purchase equipment, which is then leased to a corporation? The municipality then uses the lease payments to pay the principal and interest on the bonds. Technically these are used for the corporation’s benefit.

A

Industrial Development Revenue Bonds (IDR’s or IDB’s) - The ultimate responsibility for the payment of principal and interest rests with the corporation leasing the facility, therefore the bonds carry the corporation’s debt rating.

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13
Q

What are “Lease Rental Bonds” also referred to as?

A

LEASE BACK BONDS - A municipality issues bonds to finance the office construction for itself or its state or community. I.E. A municipality might issue bonds to raise money to construct a school and lease the finished building to the school district. With the lease payments providing backing for the bonds.

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14
Q

A type of revenue lease revenue bond that permits the investor to participate in a stream of revenues from the lease, installment, or loan payments.

A

COP’s: Certificates of Participation

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15
Q

These municipal bonds are secured by one or more designated taxes other than property taxes.

A

Special Tax Bonds

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16
Q

Municipal Bonds issued to finance the construction of public improvement such as streets, sidewalks, or sewers. Issuer assesses the tax only on the property that benefits from the improvement.

A

Special Assessment Bonds (or Special District Bonds)

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17
Q

Municipal Bonds used to develop and improve low-income housing. Because of their federal backing, they are considered most secure of all municipal bonds. Also the only municipal issues backed in full by the U.S. govt.

A

NHA’s or PHA’s - New Housing Authority Bonds or Public Housing Authority Bonds

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18
Q

T/F: To be “double-barreled” a bond must be backed by more than one municipal revenue source

A

True

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19
Q

A state or local (or agency) issued bond that, if taxes aren’t enough to pay the bond, the state legislature has the authority to appropriate funds to to make the payments.

A

Moral Obligation Bonds - note that they are REVENUE BONDS ONLY - typically issued in times of financial distress and have increased credit risk.

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20
Q 
Which of the following is backed by the full faith and credit of the U.S. Government? 
Moral Obligation Bonds
PHA's 
IDR's
Special Tax Bonds
A

PHA’s - used to construct low-income housing. The rent on these properties is guaranteed by US Gov. Considered most secure of all municipal rev bonds.

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21
Q 
Which of the following is NOT used to provide debt service for revenue bonds? 
Excise tax
Business license tax
Ad valorem tax
Alcohol tax
A

Ad Valorem tax (property taxes) are associated with General Obligation (GO) bonds, not revenue bonds. Special taxes like hotel, tobacco, liquor, and gas taxes are exceptions to the rule that taxes are associated with GO Bonds.

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22
Q

What are short-term securities that generate funds for a municipality that expects other revenues soon?

A

Municipal Anticipation NOTES (as opposed to bonds). Usually less than 12 month maturity but can be up to 3 years.

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23
Q

What do municipalities issue between tax collection periods to even out cash flow?

A

Tax Anticipation Notes

24
Q

Which muni notes are sold as interim financing that will eventually be converted to long-term funding?

A

Bond Anticipation Notes

25
Q

Which muni notes are often used in place of BAN’s and TAN’s for up to 270 days, though maturities are most often 30, 60, or 90 days?

A

Tax-exempt commercial paper…

26
Q

Which muni notes have a fluctuating interest rate and are usually issued with a put option?

A

Variable Rate Demand Notes
Variable Rate Municipals (Bonds or Notes) are sometimes called “Reset Bonds” - their price remains near par at all times because their coupon is usually reset to the market rate of interest every 6 months.

27
Q

Long term variable rate bonds tied to short term interest rates are called what? Recall their maturities are 20-30 years while their interest rates are determined using a Dutch auction.

A

Auction Rate Securities (ARS)

28
Q

What is the hazard associated with Auction Rate Securities (ARS), which can occur due to lack of demand and usually result in the downgrade in the credit rating of the securities and their issuers?

A

Failed Auction

29
Q

When municipal bonds are pre-refunded, where are the proceeds placed/invested?

A

Placed in escrow account that invests in State & Local Government Securities Series, which are issued directly by the Treasury to municipal issuers only in connection with pre-refundings.

30
Q

These were created under the Economic Recovery and Reinvestment Act of 2009 to reduce costs to issuing municipalities and stimulate the economy. Used to help municipalities issue bonds to fund municipal projects.

A

Build America Bonds (BAB’s) - note that they are taxable, so bondholders pay tax on interest received from BAB’s

31
Q

Tax Credit BAB’s provide the bondholder with a (federal/state/local) tax credit equal to __% of the interest paid on the bond each tax year.

A

Federal tax credit; 35% of interest

32
Q

Direct payment BAB’s provide no credit to the bondholder but instead provide the municipal issuer with payments from _____ equal to _____% of the interest paid by the issuer.

A

U.S. Treasury; 35%

33
Q

What is the main advantage of a variable rate municipal bond investment?

  1. Bond is likely to increase in value
  2. Bond’s price should remain relatively stable
  3. Bond is non-callable
  4. Bond’s interest is exempt from all taxes
A

2.

34
Q

If a muni wants to even out its cashflow, it is most likely to issue which of the following:

  1. TAN’s
  2. BAN’s
  3. RAN’s
  4. CLN’s
A

1 because property taxes are a primary source of cash flow for most municipalities, but are collected at intervals so they issues TAN’s backed by future tax pmts.

35
Q

Which of the following is a double-barreled bond?

  1. New Housing Authority Bond
  2. Project note
  3. Hospital bond backed by revenues and taxes
  4. GO bond used to construct a new grade school
A

3 - A double-barreled bond is backed by a defined source of revenue, other than prop taxes, plus the full faith and credit of an issuer with taxing authority.

36
Q

Your customer, a resident in Minnesota, is in the 28% fed tax bracket and the 14% state tax bracket. She must pay both fed and state taxes on which of the following?

  1. Minneapolis Housing Authority Bonds
  2. Series HH Bonds
  3. Ginnie Mae Pass-throughs
  4. Treasury Bills
A
  1. Ginnie Mae pass-throughs are subject to tax at all levels. We also know that interest income from most US Gov and Agency securities is exempt from state and local taxes, but not federal taxes so can’t be T-Bills. Also can’t be the Minne Housing Authority Bonds because interest income from municipal bonds is exempt from fed and, since she is a resident of Minn, state taxes.
37
Q

What parties enter into a bond contract?

A

Issuer, underwriter, and prospective investors.

38
Q

A collection of legal documents that include a bond resolution or trust indenture, applicable state and federal law, and other legal docs. Issuer has agreed to abide by the terms and covenants in this.

A

Bond contract

39
Q

This document authorizes the issue and sale of the municipality’s securities and contains a description of the issue.

A

Authorizing Resolution

40
Q

Although not required, most municipal issuers use one of these to make the issue more marketable. It serves as a contract between the bond’s issuer and a trustee appointed on behalf of the bond’s investors. Typically includes a flow of funds stmt establishing the priority of payments made from a facility’s revenues.

A

Bond Resolution Indenture AKA Underlying Trust Indenture AKA Protective Covenant.

41
Q

The municipal securities industry’s equivalent of a corporate prospectus. Serves as a disclosure document - anything an investor might need to know about an issue. Identifies the issue’s purpose, source of funds to pay interest and principal and issuer/community’s financial background as well as creditworthiness.

A

Official Statement (OS)

42
Q

The preliminary official statement has most of the same info as Official Statement with the exception of what two elements?

A

Issue’s interest rate and offering price. Just used to gauge interest

43
Q

This is printed on the face of every bond certificate (unless the bond is stamped ex-legal) and is signed by the bond counsel. It states that the issue is legally binding and, if interest from the bond is tax exempt, it states this as well.

A

Legal Opinion

- some munis choose not to obtain one, and so the bond certificate states “ex-legal”

44
Q

In order to issue municipal securities, the issuer must first obtain a _____, which determines whether and how the bonds may be offered.

A

Legal Opinion - first step to issuing

45
Q

After obtaining a legal opinion, the terms of the muni bond offering may be set in which two ways?

A

Negotiated Underwriting or Competitive Bidding

46
Q

When the muni appoints an investment banker to underwrite the offering and establish the interest rate and offering price.

A

Negotiated Underwriting - can be either public offering or private placement

47
Q

When a muni publishes an invitation to bid and inv bankers respond to issuers attorney. Bid with lowest net interest cost to the issuer wins.

A

Competitive Bid Underwriting - notice is usually published in The Bond Buyer and local newspaper

48
Q

Which two factors in a bond issue are not included in the official notice of sale?

A

The bond’s rating and underwriter’s name because they’ve yet TBD.

49
Q

This source publishes the 30-day visible supply (total dollar volume of municipal offerings, not including short-term notes, expected to reach the market in the next 30 days), as well as the “placement ratio indexes” (the % of total dollar value of new issues sold v. total dollar value of new issues offered for sale in the prior week.

A

The Bond Buyer

50
Q

If “visible supply” as published in the Bond Buyer is large, interest rates will likely (rise/fall).

A

If visible supply is large, interest rates will rise to attract investors to larger number of bonds available.

51
Q

If the placement ratio as published in the Bond Buyer is high, the market for municipal bonds is (strong/concerning).

A

Strong. A placement ratio of 90% means that market has absorbed 90% of the dollar volume of the bonds issued for the week, with 10% left in the dealer’s inventory.

52
Q

Which of the Bond Buyer’s Indexes is the daily price index of 40 GO and revenue bonds with an average maturity of 20 years.

A

40 Bond Index - a rise in the index indicates bond prices are rising and yields are falling.

53
Q

Which of the Bond Buyer’s Indexes is a weekly index of 20 GO Bonds with 20 years to maturity, rated A or better.

A

20 Bond Index

54
Q

Which of the Bond Buyer’s Indexes is a weekly index of 11 of the 20 bonds from the 20 Bond Index, rated AA or better?

A

11 Bond Index

55
Q

Which of the Bond Buyer’s Indexes is a weekly index of 25 revenue bonds with 30 years to maturity, rated A or better?

A

Revdex 25

56
Q

The yields on the Revdex are always (higher or lower) than the yields on the 20 Bond Index because revenue bonds (as opposed to GO bonds in the 20 bond index) have higher risk.

A

Revdex yields are higher than 20 Bond Index

57
Q

The yields on the 11 Bond Index are (higher or lower) than the yields on the 20 Bond Index because the 11 Bond index is more highly rated.

A

11 Bond Index yields are lower than 20 Bond Index

Municipal Bonds (2 decks)

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