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Debt > Municipal Debt > Flashcards

Municipal Debt Flashcards

1
Q

Tax rules for municipal bonds:

A

Exempt from Fed income tax, but is subject to state AND local tax

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2
Q

What does the bond counsel for a muni bond do?

A

Examine the issue for its validity, legality, and tax exempt status. They will then issue an opinion. An UNQUALIFIED opinion is required.
All muni bonds must have legal opinions printed on the bond

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3
Q

General obligation bond basics:

A
  • Backed by full faith, credit, and TAXING POWER of issuer

- Local govt. issues are backed by “ad-valorem” taxes

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4
Q

What is a limited tax bond?

A

This is a bond that has more credit risk than unlimited tax bonds because there is a limit placed on the rate that the issuer can tax citizens on

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5
Q

What is 1 mill, mathematically?

A

.001

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6
Q

Calculate the tax on a property with a tax rate of 7 mills, and a value of 100,000

A

.007 & 100,000 = $700

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7
Q

What is a capital appreciation bond?

A

A municipal ZERO coupon bond

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8
Q

Revenue bond basics

A
  • backed by a specific source of revenue (no taxing power) including user fees, rents, grants, excise tax, etc
  • self suppoting debt
  • exempt from trust indenture act, but hard to sell w/o one
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9
Q

What is a bond contract?

A
  • Contract prepared by the bond counsel
  • includes bond resolution (allows sale of securites)
  • will have a trust indenture
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10
Q

What is the job of the trustee?

A

To monitor the issuer’s compliance with bond contracts and protective covenants

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11
Q

What is the order of the flow of funds for pledged revenues?

A
  1. Revenue fund
  2. Operation and maintenance fund
  3. Sinking fund
  4. Debt service reserve fund
  5. Reserve maintenance fund
  6. Renewal and replacement fund
  7. Surplus fund
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12
Q

What is the revenue fund for?

A

All gross revenues are placed in this fund and all moneys disbursed are taken from this fund

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13
Q

What is the operation and maintenance fund for?

A

Money to run the facility are deposited from revenue fund into this fund

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14
Q

What is the sinking fund for?

A
  • Moneys too meet debt service requirements are deposited

- bondholders are paid from this fund

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15
Q

What is a bondholder entitled to if there is a net revenue pledge?

A

Net revenues (not gross). Net revenues are calculated as gross revenues less operation and maintenance

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16
Q

What is a bondholder entitled to if there is a gross revenue pledge?

A

The gross revenue of the bond. They are paid before operation and maint. in this case. (These are very rare!)

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17
Q

What are some examples of a special tax bond?

A

Cigarette, liquor, and gasoline taxes secure the bond

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18
Q

What are some examples of a special assessment bond?

A

These bonds only benefit a certain portion of the community, and only the beneficiaries are taxed. An example is street lights in a particular neighborhood

19
Q

What is a moral obligation bond?

A

Promise to pay, but there is no legal obligation

20
Q

What is a double barreled bond?

A

Bond backed by both revenues and taxing power

21
Q

What is an industrial development bond?

A

Bonds issued by state, city or local agency to build an industrial facility, that will be leased to a private company. Lease payments are revenue source

guaranteed by the private lessee and considered USERS liability

22
Q

What are short term municipal notes used for?

A

Temporary financing of capital improvements or to even out cash flow. Usually 12 month maturities (3 month min to 3 year max)

23
Q

What are the different types of short term muni. financing for building?

A

BAN - bond anticipation note
- start capital projects, secured by GO pledge
CLN - construction loan note
- used for multifam. projects

24
Q

What are the different types of short term muni. financing used to pull forward anticipated income before it is actually received?

A

TANS - tax anticipation notes
RANS - revenue anticipation notes
TRANS - combo
GANS - grant anticipation ntotes

25
Q

What is an optional redemption?

A

Issue CAN call after certain date, but is not obligated to do so

26
Q

What is a madatory redemption?

A

Issuer is required to call bonds on a schedule in the bond contract

27
Q

What is bond refunding?

A

When new bonds are issued to retire old bonds

28
Q

What is advance refunding?

A

When issuer believes interest rates have bottomed out and wants to sell debt while rates are LOW, but doesn’t want sale of additional bonds to lower its credit rating

29
Q

What is the solution to advance refunding worries?

A

Buy US gov’t bonds and place them in a trust. The interest on these bonds in earmarked to service old debt. Since source of revenue backing old bonds is no longer taxing power, but P&I from US debt, the bonds are no longer a debt of the issuer

30
Q

What is defeasance?

A

Term for the issuers elimination of G.O debt as its liability. This is called Escrowed to Maturity (ECM)

31
Q

What is the formula for tax collection ratio?

A

Taxes collected/taxes assessed

- If lower than 90%, muni can’t collect taxes

32
Q

What is the formula for debt service coverage?

A

Pledged revenues/debt service requirement

Should be above 1

33
Q

How are serial bonds quoted?

A

On a YIELD basis

34
Q

What is a firm quote?

A

Dealer will honor that price

35
Q

What is a nominal quote?

A

Not really a quote, dealer gives an idea of the price

36
Q

Where are trades in municipal bonds reported?

A

RTRS (within 15 minutes of execution)

37
Q

What is the accrued interest computation and regular way settlement for municipal bonds?

A

Same as corporate bonds. 30/360 and 3 business days

38
Q

How can one earn a triple tax exemption on municipal bonds? (Exempt from federal, state, and local income tax)

A

If purchaser is resident of state of issuance, or if there is a bond issued by a US territory (no matter where resident lives)

39
Q

What is the formula used to calculate equivalent TAXABLE yield? (Calculate the equal amount as if the municipal was a taxable corporate bond)

A

Tax Free Yield/100% - tax bracket

40
Q

What is the formula for the equivalent TAX FREE yield? (bondholder is considering buying a muni bond)

A

Taxable yield X (100% - tax bracket)

41
Q

What is the settlement length for a municipal bond?

A

T + 2 (trade date plus 2 days)

42
Q

What is analyzed before issuing a G.O bond?

A

Collection and debt to value ratios

43
Q

What is analyzed before issuing a revenue bond?

A

Engineer Reports

Debt service coverage ratios

Debt (6 decks)

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