municipal securities Flashcards
what is the definition of a municipal bond
a debt security by a form of government other than the federal government or an agency of the federal government
what are the two main types of municipal bonds?
- general obligation bonds
- revenue bonds
go bonds are backed by?
issuing municipality (taxes)
do go bonds require voter approval?
required
go bonds limits are subject to?
may be subject to statutory debt limits
describe the underwriting process of go bonds
generally competitive bids
go bonds analysis is based on?
tolerances to taxes, debt statements, and debt ratios
revenue bonds are backed by?
user fees (self-supporting)
do revenue bonds require voter approval?
not required
revenue bond limits are subject to?
may be subject to additional bonds tests
describe the underwriting process of revenue bonds
generally negotiated
revenue bonds analysis is based on?
feasibility studies and debt service coverage ratio
prime source of revenue for go bonds?
ad valorem taxes
how are municipal bonds taxed?
state and locally taxed
what are the two specific go bonds?
- limited tax bond
- double barreled bond
describe a limited tax bond
- go bond
- issued when issuer’s ability to raise taxes is limited
describe a double-barreled bond
- go bond
- bond issue debt funded by project revenues but backed by issuers full faith and credit (taxes)
what are some types of user charges that support revenue bonds?
tolls, concessions, fees from highways, bridges, airports, and parks
describe open-end additional bonds test
is a covenant in a trust indenture that says all investors are treated equally
are municipal bonds callable?
yes
describe the flow of funds in a net revenue pledge
operations paid first then the maintenance
1st - operation and maintenance
2nd - debt service
what are the specific types of revenue bonds?
- industrial development revenue bonds (IDRB)
- special tax bonds
- special assessment bonds
- moral obligations bonds
- public and new housing authority bonds (PHAs and NHAs)
describe industrial development revenue bonds
backed by corporations with lease back payments made to issuer
describe special tax bonds
backed by taxes other than real estate and ad valorem taxes
what is an example of taxes used to pay special tax bonds?
alcohol and tobacco taxes
what is a special assessment bond?
only assess property owners who benefit from the bond issue
what is an example of special assessment bond
public lighting in a city neighborhood (only people in neighborhood benefiting from the light will be required to pay taxes)
describe moral obligation bonds
legislative authority is required to pay back bond holders if revenues are insufficient
what are the two types of PHAs and NHAs
- section 8s
- anticipation notes
describe section 8 PHAs
bonds provide financing for low and moderate income housing and are backed by the full faith and credit of the US
describe anticipation note PHAs
short-term borrowing in advance of receiving funds from long-term debt
describe rating and yield of PHAs
- safest municipal bonds
- AAA rated
- low yields
describe municipal notes
- safe
- money market instruments
- AAA rated
- short-term
what is analyzed when issuing go bonds?
attitude towards debt and taxes
- income per capita
- employment rate
- population trend
- economic diversity
what is on a municipal debt statement
- estimated full value
- assessed value
- population
- debt
what is analyzed when issuing revenue bonds?
economic justification
- feasibility studies
- competitive facilities
- debt service coverage ratio
what companies rate municipal bonds?
- moody’s
- S&P
what company manages municipal notes?
-MIG moody’s investment grade
what are the two main private insurance companies for municipal bonds?
- national public finance guarantee corporation
- financial guaranty insurance corporation (FGIC)
describe unqualified municipal bonds
no legal problems and “unqualified” is what you want when issuing municipal bonds
describe qualified municipal bonds
there are legal issues present
describe flow of new issues with a competitive bid
- municipal dealer notification
- syndicate develops and submits bid
- lowest net interest cost wins bid
how are new issues of muni bonds notified?
the daily bond buyer
what is described in the official notice of sale of a municipal bond
- amount and purpose
- type (go or revenue)
- interest payment dates (dated date)
- maturity
- invitation to bid
- good faith deposit if required (1-2% usually)
what is the minimum investment on municipal bonds?
$5,000
what is included on a temporary confirmation of interest?
- dated date (when bonds will be available)
- extended principal (how many bonds investor wants to buy)
what is not included on a temporary confirmation of interest?
- settlement date
- accrued interest
- total dollar amount
what is sent to investor after purchase of municipal bond is settled?
- final confirmation
- official statement
what does the go index contain?
20 specific go bonds each with 20-year maturities
what does the revdex contain?
25 specific revenue bonds each with 30-year maturities
what does the 30-day visible supply contain?
total par value of all new municipals to be offered in the next 30 days
describe the placement ratio
total par value of all municipals sold / total par value of all municipals offered within the previous week
two types of syndicates and description of each
eastern- undivided %, responsible for % of any unsold bonds
western- divided, only responsible for what they commit to
describe backing away
failure of a broker dealer to own up to a firm quote.
describe a municipal bond bought at a premium
must amortize
- adjusts cost basis down to par
- premium/# of years = adjustment per year
describe a municipal bond bought at a discount
must accrete
- adjusts cost basis up to par
- discount/# of years = adjustment per year
describe OIDs and how they accrete and taxed
original issue discounts
- accrete up to par
- accretions are not taxed
describe how secondary market discount municipal bonds are taxed
discounts can accrete and are taxed as ordinary income
calculate tax-equivalent yield:
muni bond yielding 3.5%, investor in 15% tax bracket
municipal yield / (100%-investors tax bracket)
-3.5% / (100%-15%) = 4.12% taxable yield
calculate tax-free equivalent yield:
muni bond yielding 7.2%, investor in 15% tax bracket
corporate yield X (100%-investors tax bracket)
-7.2% X (100%-15%) = 6.12% tax free equivalent yield
what is the MSRB
municipal securities regulation board
- regulatory agency muni securities
- they make the rules but do not enforce
what agencies regulate banks?
- FDIC
- FRB
- comptroller of the currency
what agencies regulate broker/dealers?
- FINRA
- SEC
if broker dealer is acting as agent..
- commission is disclosed
- name of other party disclosed (on request)
if broker dealer is acting as principal..
-markup is not disclosed
how are insider traders punished?
- both tipper and tippee punished
- if found quilty, will pay 3x gain or $1,000,000
in a muni underwriting, the order period is the time in which the syndicate:
announces it will solicit customers for the issue
which type of muni bond is often subjected to the alternative minimum tax rule?
industrial development bonds
the legal opinion covers what?
- tax status of the muni debt
- the legality of the muni debt
are interest on funds borrowed to purchase muni bonds deductible?
no
the doctrine of reciprocal immunity is?
the view that neither the states nor the fed govt may tax income received from securities issued by the other.
describe the spread on a competitive bid underwriting.
is the difference between the bid to the issuer and the dollar price at which the underwriter re-offers the bonds to the public.
anticipation notes pay interest when?
at maturity (short-term market instruments)
call premiums represent the differences between what?
call price and par
-further away a call date, the lower the call premium
in muni underwriting, total takedown is defined as?
additional takedown + concession
if an indenture has a closed-end provision, this meant that..
additional issues will have junior liends
describe ARSs (auction rate securities)
- long term variable rate bonds
- maturities of 20 to 30 yrs
- interest rates reset
- failed auctions can occur
what is the bond resolution?
contains the requirement for the muni to properly keep the facilities books, reporting requirements, conditions of the maintenance covenant, terms of the rate convenant
a quotation on a muni security is assumed to be a..
bona fide quote
what is the largest component of a municipal underwriting spread?
the total takedown (additional takedown and concession)
what is the MSRBs RTRS
real time transaction reporting system
-makes pricing information for eligible muni bonds trades available to the marketplace through third party data vendors within 15 min of trade
what is the syndicate letter?
lists the terms under which members will conduct the sale of bonds. also describes each member’s sharing of profits, expenses, type of business entity. and good faith deposit requirements.
interest on direct debt issued by the us govt id tacable at?
the federal level and exempt at the state level
