Municipal Debt Flashcards
What are three types of municipal bonds?
- General obligation bonds
- Revenue bonds
- Short-term notes
What do general obligation bonds fund?
Non-self supporting projects that don’t cause revenue
What do revenue bonds finance?
Self-supporting projects
Three examples of revenue bonds?
- Municipal owned toll roads
- Airports
- Stadiums
What do short term notes fund?
activities that can be paid off in a short period of time
What three types of tax are Corporate bond interest subject to?
- Federal
- State
- Local
What two types of tax are municipal bond interest subject to?
State and local, exempt from Federal
What one type of tax is US government bond interest subject to?
Federal
When is an investor exempt from municipal bond interest tax?
If the investor is a resident of the municipality where the bond is.
What bonds are ALWAYS tax free to investors regardless of residence?
US territory bonds
What revenue source specifically pays off GO bonds?
Property taxes and associated fees, fines or assessments
what title are GO bonds backed by?
Full faith, credit, and taxing power of the municipality
What form are GO bonds issued in?
Serial form
What is a bond cousel?
A group of specialized lawyers that provide legal opinion on bond
What three things do bond counsel provide legal opinion on/
- validity
- Legality
- Tax status
What role can the municipal advisor not also act as?
Underwriter
What is the underwriter’s primary role in municipal bonds?
Sell the bond to investors
Through what method are GO bonds sold?
Competitive bidding process
What type commitment do underwriters of GO bonds make?
Firm commitment
What type of bond will a municipality issue if costs prevent the public from approving the GO bond?
Limited tax bond
What is a limited tax bond?
Type of GO bond that only has access to a predetermined amount of taxes
What is the benefit to the public of a limited tax bond?
Issuer has no incentive to raise taxes if they face challenges paying off the bond
Why are limited tax bonds more risky?
Because the issuer can’t increase taxes if they need more money to pay the bond back
What does the municipal advisor do?
Help structure bond issues
Which type - qualified or unqualified - opinions are best from the bond counsel?
UnQualified
What 4 things are used to analyze G.O. bonds?
- economic diversity
- population trends
- Municipal obligations
- Tax collection figures
What type of registration are GO bonds exempt from?
SEC Registration
What are three GO bond requirements?
- sold on a firm commitment
- Subject to voter approval
- Subject to debt limits
What does the official notice of sale do?
- notiffies underwriters of a municipal bond sale
Where is the official notice of sale found?
In the bond buyer
Which underwriter gets the bond?
Cheapest underwriter
7 things official statement discloses for GO bonds?
- Interest rate
- timing of interest payments
- length of bond
- Specific features of the bond
- source of repayment funds
- municipality’s finances
- legal opinion
What type of bond is a limited tax bond?
A GO bond
What 3 things require voter approval for Municipal bonds?
- Raising taxes
- Issuance of GO bonds
- raising debt limit
Are revenue bonds self supporting or non self supporting?
Self supporting
Why would a limited tax bond be issued by a municipality?
When they are unable to raise taxes to pay off bonds
What type of bonds require voter approval?
Bonds that utilize taxpayer funds
What is the consequence of a qualified opinion for a municipal bond issuance?
Less marketable security
What type of project is generally supported by GO bons?
Projects that lack self-sustaining revenue but are essential to the municipality
Who prepares the legal opinion for a municipal bond issuance?
Bond Counsel
What are three things the legal covers?
- Validity of signatures
- Constitutional legality
- Tax status of bond
What type of projects do municipal revenue bonds support?
Projects that make money
5 types of projects that use revenue bonds?
- Toll roads
- Airports
- Stadiums
- City zoos
- Contention centers
What is a feasibility study?
A study required to determine whether a project will be profitable and forecast demand
What type of supporting bond is a revenue bond?
Self-supporting
By what means are the borrowed funds paid off in a revenue bond?
With the funds generated by the venture
Do revenue bonds require voter approval? Why or why not?
No, because they are not paid off with taxpayer funds
Who creates the feasibility studies?
Independent consultants
What is the difference between debt limits with GO and revenue bonds?
fGO bonds have debt limits, revenue bonds do not
What is one thing revenue bonds cannot be paid of with?
Ad volarem tax
What are three things municipal revenue bonds can be paid off with?
- Lease rentals
- Profits from the funded project
- Special taxes
What are two types of long - term municipal debt securities ?
GO and revenue bonds
What type of bond will a municipality requiring short term funding issue?
Notes
What is the range in maturity for a note?
3 months to 3 years
What does an anticipation note allow?
For municipalities to borrow money for a short period, spend that money, and use taxes, revenues, or capital money received in the future to pay back borrowed funds
What are 5 types of anticipation notes?
- Tax anticipation notes
- revenue anticipation notes
- tax and revenue anticipation notes
- bond anticipation note
- grant anticipation note
What do tax anticipation notes allow?
Municipality to spend money on a public project and repay borrowed funds with ffuture tax collections
What benefit do tax anticipation notes have for the municipality?
They can utilize taxes throughout the year
What are revenue anticipation notes?
Allows municipality to spend money on a revenue-related project
What is the main difference between tax anticipation notes and revenue anticipation notes
Tax anticipation uses taxes to pay back the bond revenue uses revenue from th eproject
What do tax and revenenue (TRANs) bonds allow for?
If a municipality wants to spend money on multiple projects but only wants to issue one form of debt
When are Bond anticipation notes issued and for what?
Issued before a long-term bond issuance to finance smaller preemptive measures related to the project
When are grant anticipation notes issed?
When a federal grant is expected or awarded
What time-scale security are variable rate demand obligations, and what else?
Long term, with short-redemption options
What does an investor receive along with a variable rate bond?
A put option
How do VRDNs differ in interest rates from normal bons?
Every few weeks the note resets its interest rate to the current market interest rate
How are BANs paid off?
With money raised by a future bond issuance
What -term are variable rate demand notes?
Long term but with short-term redemption options
What are three things TRANS are issued in anticipation of?
- taxes other than property taxes
- revenues to be collected
- ad valorem taxes
What are RANs not issued in anticipation of?
Ad Valorem taxes
What are three things RANs are issued in anticipation of?
- vehicle registration fees
- excise taxes
- profits from municipal ventures
Are municipal bonds liquid or illiquid?
illiquid
Why do municipal bonds not trade short?
Because of their liquidity risk, noone is trading
In what market do municipal bonds trade?
OTC
In what form are municipal bonds quoted?
Yield
What type of risk do municipal bonds have?
liquidity risk
When is a bond trading at a discount?
When the bond’s yield to maturity is higher than the coupon
Do municipal bonds maintain low or high interest rates and yields?
low
When should an investor consider a low-yielding municipal bond?
If they are in a high tax bracket
What type of account are municipal bonds unsuitable for and why?
Retirement accounts because retirement accounts already have tax shelter so you should opt for something higher yielding
How to find the after-tax return?
multiply the yield percentage by 100 minus the tax bracket
