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Series 7 Top-off Exam > Municipal Securities > Flashcards

Municipal Securities Flashcards

This deck focuses on municipal securities characteristics, taxation, and regulation by the MSRB.

1
Q

What are the two main types of munis typically issued?

A
  1. Revenue bonds - backed by a revenue producing facility
  2. General obligation (GO) - backed the taxing power of the issuing municipality
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2
Q

What are the key obligations of a bond counsel in a municipal bond issuance?

A
  • Provide a legal opinion of the issue and make sure the issue is consistent with securities law
  • Confirm the issue’s tax-exempt status
  • Confirm the municipality’s legal authority to issue the bonds
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3
Q

What are the two types of legal opinions for muni securities?

A

Qualified and Unqualified

  • Qualified - This means that there are concerns or qualifications regarding the legality of the issuance; this puts the deal at risk
  • Unqualified - means there are no concerns or qualifications regarding the legality of the issuance; this is preferred
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4
Q

What are the three types of bond maturity?

A
  1. Balloon maturity: Borrower pays off a small portion of the principal prior to maturity and pays off the remaining portion at maturity
  2. Serial maturity: A portion of the notional amount is set to mature at regular intervals, usually years, and each interval has a different coupon rate
  3. Term maturity: The entire bond matures at the same time; this is the most common type
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5
Q

For what types of projects do municipals use general obligation bonds?

A

Non-revenue projects

GOs are supported by the taxing authority of the municipality issuing the bond. They are used for projects that produce no revenue and will be paid for via taxes. These include basic service projects like public schools, public parks, and public buildings.

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6
Q

What are ad valorem taxes?

A

Ad valorem taxes, also referred property taxes, help to support GO bonds that are issued by cities and counties. Property taxes are based on the assessed value of the property, which is taxed in mils. An investor will pay $1 of taxes for every $1,000 of assessed value.

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7
Q

What are the key factors in analyzing the credit quality of a municipal general obligation bond?

A
  • Existing direct debt of the municipality
  • Debt per capita
  • Assessing the tax base of the issuer: average income, age, local industries, etc.
  • Covenants
  • Overlapping debt; sometimes a municipality shares the debt load with another because they will both use the service (e.g. a public ferry in between the two cities).
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8
Q

Who is entitled to collect property taxes?

A

Only the local city or county government

States are not allowed to collect property taxes so general obligations issued by the state depend on income, sales, and excise taxes.

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9
Q

What is the primary protection for the investor in municipal general obligation issues?

A

Constitutional Debt Limits

Some states limit the amount of debt any municipality can take on and most municipalities require a vote before issuing debt. Both of these protect investors. The city and county have a legal right to raise property taxes to pay the bondholders. This makes the GOs the safest investment for the investor. However, a limited-tax bond is less safe for an investor because it caps the degree that a city or county can raise taxes and limits their ability to pay bond holders.

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10
Q

What is the combination of a general obligation and revenue bond called?

A

Double-barrel bond

In a double-barrel bond, if the revenue is not sufficient, there is a legal obligation by the municipality to make up the shortfall from taxes.

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11
Q

From where can a revenue bond draw income to pay bondholders?

A

Almost any project that individuals will pay additional monies to use. Airports, colleges, tolls, stadiums, and utilities are all examples of projects that could be supported by the fees and income generated from the completed project.

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12
Q

What are examples of types of analysis should be performed on revenue bonds?

A
  1. Feasibility studies - revenue bonds rely on income that isn’t guranteed so they are naturally riskier than GOs. Is the supporting project feasible?
  2. User charges - are the fees for use of the project high enough to sustain debt payments based on the expected number of users?
  3. Demographics - are there enough users in the area?
  4. Covenants - protections in place that details the rights of the bondholders and obligations of the issuer
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13
Q

Where are the covenants of a revenue bond listed?

A

The Trust Indenture

This will contain all the obligations of the issuer as well as outlining specific protections that protect the investor. The indenture will also specify a trustee who will ensure compliance with the indenture.

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14
Q

What are two of the most common types of covenants?

A
  1. Insurance covenant - the commitment to ensure anything built with the revenue bonds
  2. Rate covenant - an assurance that usage rates will be kept high enough to maintain the project after completion.

Note: as much as the indenture is used by municipal issues, it isn’t required, as bonds are covered under the Trust Indenture Act of 1939, which does not require indentures. Because of their use in corporate debt, it has become common for municipal securities to follow suit.

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15
Q

What are the two different orderings of cash flows found in the flow of funds statement for a revenue bond?

A

Gross Revenue vs. Net Revenue

In a net revenue pledge, all operations and maintenance are paid first. This is assumed unless a gross revenue arrangement is stated in the indenture. In the indenture, an issuer can specify a reserve fund that funds a few years of payments to investors as a buffer. In a gross revenue pledge, investors are paid first, then maintenance, then the reserve fund.

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16
Q

What is an industrial development revenue bond?

A

IDRBs are issued by a municipality to construct industrial facilities or factories that will in turn be leased to an occupant to start a business and create jobs. Their cash flow comes from the company making lease payments. Since the company makes payments, which in turn the municipality pays to bondholders, the industrial development bond will have the same credit rating as the corporation.

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17
Q

What is the name for revenue bonds that are also backed by a non-binding pledge of the legislature?

A

Moral Obligation Bonds

These bonds are backed by a revenue producing facility and non-binding pldege of the legislature. If the revenue is not sufficient, the lawmakers, at their discretion, can make up the shortfall from taxes.

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18
Q

What are variable rate munis?

A

These bonds are issued with some floating interest rate that changes periodically based on a benchmark rate such as the rate on Treasury bills. Because their interest rate changes with the market, their price tends to remain relatively stable.

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19
Q

What is short-term muni debt called?

A

Muni Notes

These are issued with maturities of a year or less and are typically issued with the expectation of future anticipated tax or non-tax revenues that the issuer will use to pay off the debt.

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20
Q

What are the types of muni notes typically issued?

A
  • Tax anticipation note (TAN) - used when future tax revenue is anticipated for but the state needs the funds now
  • Revenue anticipation note (RAN) - used when future non-tax revenue is anticipated but the state needs the funds now
  • Tax and revenue anticipation (TRAN) - has two streams of income supporting the note (taxes and future revenues)
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21
Q

For municipal securities, what is the analog to the prospectus required for stocks and bonds under the Act of ‘33?

A

Official Statement

Recall that municipal securities are exempt from the Securities Act of 1933 so they are not required to issue a prospectus. However, they have a similar disclosure document called an official statement ithat is very similar to a prospectus. None of the official statement is reviewed by, nor on file with, the SEC.

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22
Q

What purpose does the official statement serve?

A
  • Primary disclosure document for munis
  • The official statement discloses material information to potential investors.
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23
Q

What are the two types of underwritings for muni securities?

A

Negotiated and Competitive Offering

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24
Q

What are the characteristics of a negotiated muni offering?

A

In a negotiated underwriting, the municipality appoints an underwriter based on a myriad of factors, including sector expertise, price, and relationship with the issuer.

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25
Q

What determines the winner of a competitve offering?

A

Lowest net cost to issuer

In a competitive underwriting, the underwriter that will cost the municipality the lowest amount of interest over the life of the bonds will be awarded the deal. In this case, best price wins, relationship with the issuer makes no difference.

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26
Q

What is the notice of sale?

A

The notice of sale is the document released by the issuer to invite bids in a competitive sale.

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27
Q

What forms the syndicate in a muni underwriting?

A

Syndicate Agreement

The investment bank will have its own capital on the line and after seeing the ad appear will evaluate their ability to sell the issue and determine how much capital to risk, if they have other orders, etc. Once they decide to pursue the underwriting they sign a syndicate agreement with other members to spread the risk.

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28
Q

What details are usually found in the syndicate agreement?

A
  • Amount of capital commited by each member
  • The identity of the lead manager of the syndicate
  • How long the syndicate agreement will be in effect
  • The fee for the elected manager and the spread paid to other members of the syndicate
  • Outline of who shares liability for unsold bonds and in what proportion
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29
Q

What is the distinction between an Eastern and Western muni underwriting?

A
  • An Eastern underwriting is an undivided account, where all underwriters share liability for any unsold bonds.
  • A Western underwriting is an divided account, where all underwriters are only responsible for their own allotment of bonds.
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30
Q

During a primary issue of municipal securities, what is the order of allocation of sales?

A

During the primary offering, just as in a stock IPO, the offering can be oversubscribed. In this event, there is a particular order in which the syndicate will award shares:

  1. Presale Orders
  2. Group Orders
  3. Designated Orders
  4. Member Orders
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31
Q

What type of bonds are purchased “when issued?”

A

Bonds that are legally authorized but not yet issued

The term “when issued” is not specific to munis, and simply means the bond has been sold and will be ready for issue soon.

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32
Q

Why are municipal securities not typically sold short?

A

Because of the lack of liquidity in the muni market, it is challenging for investors to cover a short that requires the purchase of that exact bond.

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33
Q

How are munis quoted?

A

Munis trade on a yield basis instead of by price. The yield typically quoted is the yield to maturity.

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34
Q

What are the three types of muni quotes in the secondary market?

A
  1. Subject quote - information or indication only
  2. Firm - can trade at that price or yield right now
  3. Working indication - bond not in inventory but broker can get it for around this price. Has to source the issue somewhere else.
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35
Q

What are the markup or markdown rules for munis?

A

Only when a broker-dealer is making a transaction as a principal is a markup or markdown taken. When the broker is purely acting in an agency between buyer and seller, they charge a commission. If the broker-dealer is selling to a customer they markup and if they are buying they mark down.

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36
Q

What is the anti-reciprocal rule?

A

Prohibits a dealer from making a deal with institutional customer that states if the institution buys munis from the dealer, then the dealer will sell more of that institutions’ products.

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37
Q

What is the taxable equivalent yield of a municipal security?

A

Since municipal securities pay interest that is tax-free, in order to compare a tax-free income to a taxable interest paying instrument, the taxable equivalent yield must be calculated, This is done by dividing the tax-free yield by (100% minus the investor’s tax bracket).

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38
Q

Define:

accretion of bond discount

A

Accretion is the annual adjustment of the cost basis of a discount bond towards par. For an original issue discount (OID) municipal bond, the annual accretion is not taxed. For any other discount bond, the annual accretion is taxed each year as ordinary income.

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39
Q

Define:

accrued interest

A

The interest that is paid by the buyer of a bond to the seller of a bond when a bond is traded between coupon dates. It is calculated from the prior coupon date, including that date, up to, but not including the settlement date.

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40
Q

What are the settlement rules for corporate, municipal and treasury securities?

A

Corporate and municipal bonds now settle one business day after the trade date (T+1) - called regular way settlement - and US Government bonds settle in one business day after.

Interest begins to accrue on the date of settlement, not the trade date.

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41
Q

A 3% corporate bond pays interest on February 1st and August 1st. The trade date is Monday, June 12th. What is the number of days of accrued interest?

A

To calculate the number of days of accrued interest, go from the prior interest payment date (including that date), up to, but not including the settlement date. In this case, go from February 1st up to, but not including the settlement date of June 13th (T+1 settlement). Calculate on a month-by-month basis, remembering that for corporates, each full month has 30 days.

  • Feb: 30 days
  • Mar: 30 days
  • April: 30 days
  • May: 30 days
  • June: 12 days (up to, but not including, June 13th)

Total Accrued Days = 132 days

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42
Q

What is the importance of the dated date?

A

This is when the buyer begins to accrue interest and it continues to accrue up to the settlement date. The day of settle is the first day the buyer will receive interest accruals.

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43
Q

For accrued interest calculations, how many days are in a month or year for corporate, municipal, and treasury bonds?

A

The only instrument that uses the actual days in each month is US Government bonds. For those, accrued interest is calculated by using actual day count.

For corporates and munis, we assume every month has 30 days for the calculation.

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44
Q

Define:

additional takedown

A

The compensation earned by the syndicate manager or syndicate member for taking on risk for a bond. It is based on each firm’s allocations.

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45
Q

Define:

advance refunding

A

The act of issuing new bonds at a low rate call away more expensive bonds, that are not yet callable, at a later date.

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46
Q

Define:

balloon maturity

A

A bond maturity schedule where some debt matures each year, but the bulk of the bonds matures at once.

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47
Q

Define:

bond interest coverage ratio

A

Also referred to as the coverage ratio, it is a comparison of the annual revenues generated by a facility to the annual debt service owed to bondholders. It is used in the analysis of revenue bonds.

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48
Q

Define:

bond swap

A

The simultaneous buying and selling of two different issues with different maturities.

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49
Q

Define:

catastrophe call

A

A call where the municipality redeems the debt prior to maturity due to some catastrophe occuring.

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50
Q

Define:

coterminous

A

Services within the same community that share the same geographic boundary but that may issue bonds seperately. For example, school bonds and bonds for a water plant. This is important because they will be backed by the revenues from the same group of people. Multiple coterminous projects could increase the tax burden on a small population and therefore limit its ability to pay.

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51
Q

Define:

covenant

A

The part of an indenture that specifically outlines bondholder rights and protections. This is relevant for revenue bonds.

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52
Q

Define:

debt per capita

A

A measure of muni risk that divides the total outstanding debt and coterminous debt by the number of tax payers in that district. This is relevant for GO bond analysis.

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53
Q

Define:

Doctrine of Mutual Reciprocity

A

This is the agreement between the state and federal government that allows municipal securities to be federally tax-exempt. The federal government doesn’t tax state and local coupon payments as income to the shareholder and the state doesn’t tax income tax from income gained from US Treasuries.

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54
Q

Define:

double-barreled bond

A

A muni backed by both revenue and taxing authority. This is a feature that protects the bond holder so all else being equal, this type of security will trade at lower yields.

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55
Q

Define:

Eastern account

A

A style of underwriting where the syndicate members will be responsible for a pro-rata portion of unsold shares if another member of the syndicate is unable to sell all of theirs.

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56
Q

Define:

general obligation bond

A

A municipal bond issed for the benefit of a non-revenue producing facility. It is backed by the taxes of the issuing municipality.

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57
Q

Define:

gross revenue pledge

A

This is a covenant that protects bondholders by stipulating that all interest and principal payments are made first before operating and maintenance costs are paid. This is found in the flow of funds statement for revenue bonds.

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58
Q

Define:

industrial development revenue bond

A

A muni security that is issued to finance building something that private companies will use. These bonds are backed by lease payments made by the corporation to the municipality and therefore the credit risk is that of the corporation not the municipality.

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59
Q

Define:

limited-tax bond

A

A muni GO where there has been a limit placed on how much the issuer can raise taxes to make interest payments. This works against the bondholder in the event that taxes at the cap aren’t sufficient to meet interest payments.

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60
Q

Define:

market discount bond

A

A municipal bond purchased in the secondary market for a discount. Because the discount is market driven the annual accretion becomes taxable.

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61
Q

Define:

market premium bond

A

A municipal bond purchased in the secondary market for a premium. The premium must be amortized (or reduced) each year.

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62
Q

Define:

mill rate

A

This is the rate that municipalities are able to charge on the assessed value of property. It equals .001%. Put differently, an investor will pay one dollar of tax for every $1,000 of assessed value.

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63
Q

Define:

moral obligation bond

A

A municipal bond backed by a revenue producing facility and a non-bind pledge of the legislature. If the revenue is not sufficient, the lawmakers, at thier discretion, can make up the shortfall from taxes.

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64
Q

Define:

MSRB

A

A self-regulatory organization, that is empowered by and accountable the SEC, that helps to regulate municipal securities firms and professionals. Take note, the MSRB does not regulate the issuers of munis.

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65
Q

Define:

net overall debt

A

A figure that helps to analyze GO bonds. It is calulated as the total debt of the municipality minus any self-supporting debt (e.g. revenue bonds) plus the municipality’s share of any overlapping debt.

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66
Q

Define:

net revenue pledge

A

Found in the flow of funds statement for revenue bonds and indicates that the municipality will pay operating and maintenance first before any debt service.

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67
Q

Define:

official notice of sale

A

A document released by the issuer to invite bids in a municipal bond competitive sale.

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68
Q

Define:

official statement

A

A disclosure document that takes the place of a prospectus for new issue municipal securities.

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69
Q

Define:

preliminary official statement

A

The document used in a municipal underwriting to solicit indication of interest. Similar to the red-herring in a corporate offering.

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70
Q

Define:

qualified legal opinion

A

A legal opinion that expresses some concerns about the legalility of a new municipal bond issuance. Often times, a qualified opinion will kill the deal.

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71
Q

Define:

revenue anticipation note

A

A short-term municipal note issued by a municipality in anticipation of receiving future non-tax revenue.

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72
Q

Define:

revenue bond

A

A type of municipal security whose interest and principal will be paid by the revenue generated from the project that is built with the funds raised.

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73
Q

Define:

revenue pledge

A

This pledge will be written in the indenture of a revenue bond describing in what order the investors will be paid. There are two types: gross revenue pledge and net revenue pledge.

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74
Q

Define:

special assessment bond

A

A municipal bonds that are backed by an assessment on those who directly benefit from the improvements the bonds fund.

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75
Q

Define:

special revenue bond

A

Municipal bonds that are backed by a tax on a complimentary product. For example, a tax on gasoline might help to support the maintenace of roads in a city.

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76
Q

Define:

tax and revenue anticipation note

A

A short-term municipal note issued by a municipality in anticipation of receiving future tax and non-tax revenue.

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77
Q

Define:

tax-equivalent yield

A

The yield that would effectively be earned by the investor if the issuer were taxable. Tax-free issues trade at lower yields because of the tax-free benefit; in order to evaluate relative value, a tax-equivalent yield calculation is necessary. It is calculated as the (tax-free yield)/(1-tax rate).

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78
Q

Define:

total takedown

A

The amount a syndicate member receives if they both take on risk for bonds and sell the bonds themselves.

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79
Q

Define:

unlimited tax bond

A

A general obligation bond where there is no limitation on the municipality’s taxing power to redeem the bonds.

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80
Q

Define:

unqualified legal opinion

A

A legal opinion where there are no concerns regarding the municipality’s authority to issue the debt. This the preferred type of legal opinion.

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81
Q

Required when a representative receives a written customer complaint

A

Inform supervisor or principal

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82
Q

Use a 360-day year in the calculation of accrued interest

A

Municipal and corporate bonds

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83
Q

Use a 365-day year in the calculation of accrued interest

A

U.S. Government bonds and notes

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84
Q

Of YTC, YTM and CY, the yield that is highest when a bond is trading at a premium and is callable

A

Current Yield (CY)

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85
Q

Of YTM, YTC and CY, the yield that is highest when a bond is trading at a discount and is callable

A

Yield to Call (YTC)

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86
Q

Of YTM, YTC and CY, the yield that is lowest when a bond is trading at a discount

A

Current Yield (CY)

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87
Q

Of YTM, YTC and CY, the yield that is lowest when a bond is trading at a premium and is callable

A

Yield to call (YTC)

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88
Q

Interest payment varies based on performance of an index

A

Variable rate or adjustable rate bonds

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89
Q

Special account in which Issuer funds are set aside in advance of a call

A

Sinking fund

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90
Q

Allows bonds to be called before maturity if certain specified events like natural disasters occur

A

Catastrophe clause

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91
Q

An issuer with outstanding bonds that have a 5% coupon issues similar new bonds with a 6% coupon. The outstanding bonds will trade at a

A

Discount

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92
Q

An issuer with outstanding bonds that have a 5% coupon issues similar new bonds with a 4% coupon. The outstanding bonds will trade at a

A

Premium

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93
Q

An investor buys a 6% bond trading at a 6.5% basis. The bond is purchased at a

A

Discount

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94
Q

An investor buys a 6% bond trading at a 5.5% basis. The bond is purchased at a

A

Premium

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95
Q

Federal and state tax treatment of most municipal debt interest

A

Exempt from taxation at the federal level; may be taxable at the state level

96
Q

Tax treatment of capital gains from sales of municipal bonds

A

Taxable

97
Q

Entities authorized to issue municipal debt

A

U.S. territories, State governments, local taxing authorities like county and city governments and certain authorities

98
Q

Full faith and credit municipal issues

A

General Obligation bonds

99
Q

Backing for Municipal General Obligation Bonds

A

Municipality’s taxing authority

100
Q

Three types of taxes that back bonds issued by states

A

Income taxes, license fees, and sales taxes

101
Q

Type of tax that backs general obligation bonds issued by cities and counties

A

Property taxes (ad valorem taxes)

102
Q

Overlapping debt that raises funds from the same taxpayer base

A

Coterminous debt

103
Q

Municipal bonds backed by both revenue and taxes

A

Double-barreled bonds

104
Q

Self-supporting municipal debt

A

Revenue bonds

105
Q

Conducted to determine estimates of revenues that may back a future bond issue

A

Feasibility study

106
Q

Empowers a trustee to act in the best interest of the bondholders

A

Trust indenture (bond resolution)

107
Q

Permits the calling of bonds if the facility is destroyed under extraordinary circumstances.

A

Catastrophe clause

108
Q

Municipal bonds where the responsibility of principal and interest payments is with the corporation leasing the facility

A

Industrial development revenue bonds

109
Q

Unique tax treatment of industrial development revenue bonds

A

Interest is typically taxable at all levels

110
Q

Permits issuing additional bonds with the same status and equal claim to revenues as those outstanding

A

Open-ended indenture

111
Q

Any additional bonds issued are junior in claim to bonds currently outstanding

A

Closed-ended indenture

112
Q

Portion of the trust indenture that specifies the priority and allocation of revenues

A

Flow of funds

113
Q

Type of self-supporting debt secured by sales, tobacco, fuel or business license taxes

A

Special tax bonds

114
Q

Considered the most secure of all municipal bonds because of U.S. government backing

A

New Housing Authority bonds (NHAs), sometimes called Public Housing Authority bonds (PHAs)

115
Q

State legislature may authorize funds to pay debt service when revenues or tax collections are insufficient

A

Moral obligation bonds

116
Q

Maturity of typical municipal notes

A

12 months or less

117
Q

Forms of short-term debt issued to finance current operations in anticipation of tax collections or revenue collections

A

TANs and RANs

118
Q

Municipal bonds and notes that are issued with a floating rate of interest

A

Variable rate municipals (variable rate demand obligations)

119
Q

US. Government security into which proceeds of a municipal pre-refunding are invested

A

State and Local Government Securities Series (SLGs)

120
Q

Collection of legal documents between a municipal issuer, underwriter and prospective investors

A

Bond contract

121
Q

Describes the issue and authorizes the issue and sale of its securities

A

Bond resolution

122
Q

Municipal issue disclosure document for prospective buyers

A

Official statement

123
Q

When each prospective purchaser must receive a final official statement

A

At or before the settlement date

124
Q

Issues of municipal securities that do not include a legal opinion, with the legal opinion to follow

A

Ex-legal

125
Q

Legal opinion that gives unconditional confirmation of the legality of the issue and its tax treatment

A

Unqualified legal opinion

126
Q

Type of legal opinion preferred by the municipal issuer

A

Unqualified legal opinion

127
Q

Published notice that solicits bidding for an upcoming municipal bond issue

A

Official Notice of Sale

128
Q

Daily publication that is the authoritative source of information on primary market municipal bonds

A

The Bond Buyer

129
Q

The Bond Buyer’s projected total dollar volume of new issue municipal bonds coming to market in 30 days

A

30-day visible supply

130
Q

The Bond Buyer’s published percentage of new issues sold vs. new issues offered for sale the prior week

A

Placement ratio (Acceptance ratio)

131
Q

Group of investment bankers that collectively share the risk of a competitive bid

A

Syndicate

132
Q

Document that formalizes the participation of the syndicate members in a competitive bid underwriting

A

Syndicate letter

133
Q

Document that formalizes the relationship between the syndicate members in a negotiated underwriting

A

Agreement among the underwriters

134
Q

Also known as a divided account

A

Western account

135
Q

Also known as an undivided account

A

Eastern account

136
Q

Each underwriter is responsible for its own underwriting allocation

A

Western account

137
Q

Each underwriter has responsibility for a proportionate share of any unsold bonds in the issue

A

Eastern account

138
Q

The process during which underwriters investigate the issuer and proposed issue

A

Due diligence

139
Q

The process of establishing the reoffering yield or price for each maturity in the municipal bond issue

A

Writing the scale

140
Q

Calculation for municipal bid comparison that is adjusted for the time value of money

A

True interest cost

141
Q

The two components of the total takedown

A

Selling concession and additional takedown

142
Q

The portion of the total takedown that compensates selling group members

A

Selling concession

143
Q

The portion of the total takedown that is kept by syndicate members in sales to selling group members

A

Additional takedown

144
Q

The portion of the municipal bond spread paid to the syndicate manager

A

Manager’s fee

145
Q

Price paid by syndicate members when purchasing from the syndicate manager

A

Takedown price

146
Q

The price at which a new issue municipal bond is sold to the public

A

Reoffering price (or reoffering yield)

147
Q

The amount of the underwriting discount offered to firms that are not members of the syndicate or selling group

A

Reallowance

148
Q

Firms that assist the syndicate in distributing new municipal bonds without financial risk

A

Selling group

149
Q

Dollar value of a 1/2 point spread in municipal bond underwriting

A

$5

150
Q

Syndicate allocation priority as defined in the syndicate letter

A

Presale, group, designated, member order

151
Q

The date on which interest on new municipal bonds begins to accrue

A

Dated date

152
Q

The date on which new issue municipal bonds with final legal opinion are delivered to the underwriters for payment

A

Settlement date

153
Q

Safety of this type of municipal debt is determined by assessing the municipality’s ability to raise enough tax revenue to pay its debt

A

General Obligation bonds

154
Q

Statutory limits on the amount of debt a municipality can carry

A

Debt limit

155
Q

A municipal entity’s direct debt less sinking fund accumulations and all self-supporting debt

A

Net direct debt (also called net bonded debt)

156
Q

Computation that shows how many times annual revenues will cover debt service

A

Debt service coverage ratio

157
Q

Typical rating of insured municipal bonds

A

AAA

158
Q

Short-term municipal debt rated by Moody’s

A

MIG

159
Q

Trading market for municipal bonds

A

Over-the-counter market

160
Q

A firm quote that represents a municipal dealer’s best judgment of the fair market value of the security

A

Bona fide quote

161
Q

A non-firm estimate of a municipal security’s value provided for information only

A

Nominal (or subject) quotation

162
Q

Municipal firm that specializes in helping firms place unsold portions of municipal issues with other firms

A

Broker’s broker

163
Q

The SRO for the issuance and trading of municipal securities, but not enforcement

A

Municipal Securities Rulemaking Board (MSRB)

164
Q

The enforcement authority for MSRB rules concerning broker-dealers

A

FINRA

165
Q

Equation for calculating tax-equivalent yield

A

Municipal tax free yield/100% - investor’s tax rate

166
Q

How long municipal advertising by broker-dealers must be kept on file

A

Four years

167
Q

When municipal advertising must be approved

A

Prior to use

168
Q

Firms acting as a financial advisor for municipal issues are prohibited from acting in these types of underwriting arrangements

A

Both Negotiated Sale and Competitive Bid

169
Q

Regular way settlement for municipal securities

A

T + 1

170
Q

When municipal confirmations must be sent or given to customers

A

At or prior to completion of a transaction

171
Q

The total principal value of all securities on a confirmation

A

Extended principal

172
Q

Maximum value of gifts permitted from municipal dealers in one year to a client

A

$100

173
Q

When written disclosure of municipal control relationships must be made

A

No later than at the time of confirmation

174
Q

Number of days per year in the calculation of accrued interest for municipal bonds

A

360

175
Q

Maximum political contribution allowed for municipal finance professional in a single election

A

$250

176
Q

Length of time for which a municipal firm is banned from financial advisory and negotiated business with an issuer after excessive political contributions were made to an official of that issuer

A

2 years

177
Q

Type of municipal issue that may require voter approval through a referendum

A

General Obligation bonds

178
Q

Type of municipal issue that may be subject to an additional bonds test

A

Revenue bonds

179
Q

Considered the safest type of municipal issue

A

General Obligation bonds

180
Q

Type of municipal issue most concerned with competing facilities

A

Revenue bonds

181
Q

Type of revenue pledge in which debt service is paid first

A

Gross revenue pledge

182
Q

Type of municipal issue which may be impacted by debt limits

A

General obligation bonds

183
Q

Document in which a municipality’s debt statement is found

A

Official statement

184
Q

Incomplete version of an official statement that does not include final interest rates and offering price

A

Preliminary official statement

185
Q

A transaction in municipal securities that is executed for a commission

A

Agency transaction

186
Q

The dealer charge when municipal securities are sold as principal

A

Markup

187
Q

The dealer charge when municipal securities are purchased as principal

A

Markdown

188
Q

Required frequency of reporting contributions by MFPs to the MSRB

A

quarterly

189
Q

Two types of call provisions not included on a customer confirmation

A

Catastophe and Partial Call

190
Q

The process of adjusting the cost basis of a bond purchased at a discount

A

Accretion

191
Q

The process of adjusting the cost basis of a bond purchased at a premium

A

Amortization

192
Q

The cost basis at maturity of a municipal bond purchased at a price of 108 with 8 years to maturity

A

Cost basis = par

193
Q

Tax calculation performed to ensure that deductions that have been claimed do not reduce tax liability beyond a certain minimum level

A

Alternative minimum tax computation

194
Q

Interest on bonds of this issuer is taxable at state and certain local levels, but is exempt from taxation at the federal level

A

Municipal

195
Q

What type of organization is the Municipal Securities Rulemaking Board?

A

MSRB is a self regulating organization (SRO) that governs the sale of municipal securities.

196
Q

What type of insurance (bond) must be maintained by MSRB Members?

A

All members must maintain fidelity bonds, which are issued by insurance companies in order to protect against theft.

197
Q

According to MSRB rules, what is the gift limit to customers?

A

$100

The rules state that occasional dinners or tickets are also acceptable and do not count towards the $100 limit as long as the registered rep attends.

198
Q

Who must approve all municipal advertising at a firm?

A

A firm’s municipal or general securities principal must approve each advertisement in writing prior to first use.

199
Q

What is the muni day count for both days in a month and days in a year?

A

Munis trade 30/360

200
Q

What is the maximum political contribution that a municipal finance professional can make to someone they are eligible to vote for?

A

$250 per election

201
Q

What must happen if an employee, spouse, or minor child of a MSRB firm opens a brokerage account with another?

A

The firm where the account is opened must notify the employer in writing, and must send duplicate copies of all confirmations to the employer.

202
Q

Under what circumstances can a municipal advisor become an underwriter on the same issue?

A

This is not allowed under any circumstance

203
Q

According to MSRB rules, when must customer trade confirmations be sent?

A

Customer trade confirmations must be sent to customers at or before the settlement date of the transaction.

204
Q

When are municipal bonds triple tax free?

A

If an investor purchases a public purpose municipal bond from their home state, the issuance will be triple tax free, meaning tax free at the federal, state and local levels. Additionally, if the issuing municipality is a US territory, possession, or commonwealth, the interest income is triple tax free regardless of who the purchaser is.

205
Q

What type of investor benefits the most from municipal bonds?

A

Because municipal bonds provide tax-free interest income, they are most appropriate for high net worth investors who will most benefit from the tax savings.

206
Q

If munis are tax exempt, how does that change the implied yield on the security?

A

In order to compare taxable and non-taxable securities, it is helpful to calculate the tax equivalent yield between the two bonds.

Tax Equivalent Yield =

Tax Free Yield / (100% - tax bracket percentage)

Since this number will naturally be lower than 1, dividing it into the yield will “raise” the yield and make comparison easier.

207
Q

What is the difference between accretion and amortization?

A

The cost basis of a bond will be adjusted towards par each year.

  • Accretion is the upward adjustment of the cost basis of a discount bond towards par.
  • Amortization is the downward adjustment of the cost basis of a premium bond towards par.
208
Q

Assume a bond is purchased for $1,050 with four years to maturity. What is the capital gain or loss on the bond if it is sold after one year at $1,050.

A

To find the amount the bond will be amortized, take the premium above par divided by the years to maturity. In this case: $50/4 = $12.50 per year. Therefore, after year 1, the adjusted cost basis of the bond will be reduced by $12.50, or $1,037.50. If the bond is sold after one year for $1,050, they would recognize a capital gain of $12.50 (difference between sale price and amoritzed value).

209
Q

In a municipal bond underwriting, what is the typical priority of orders?

A
  1. Pre-sale orders
  2. Group orders
  3. Designated orders
  4. Member orders
210
Q

What are the two types of syndicate accounts in a municipal bond underwriting?

A
  • Eastern Account: This is an undivided account where each syndicate member is responsible for any unsold securities based on their initial allocation in the underwriting.
  • Western Account: This is a divided account where each syndicate member is responsible only for their own allocation.
211
Q

Which type of municipal bonds are serviced by the income generated from specific revenue-producing projects?

A

Revenue bonds

212
Q

What type of municipal bond is backed by a non-binding pledge of the state legislature?

A

Moral obligation bonds

Moral obligation bonds are backed by a revenue producing facility and a non-binding pledge of the legislature. This means, if the revenue is not enough, the lawmakers can make up the shortfall through taxes at their discretion.

213
Q

Municipal general obligation bonds are backed by:

A

The taxing power of the issuer

214
Q

If an investor believes that interest rates will experience a major decline, the investor should invest in a portfolio of:

A

Long-term bonds with low coupons

These types of bonds are most sensitive to changing rates. Therefore, if rates fall, long-term, low coupon bonds will appreciate the most in price.

215
Q

A municipal revenue bond is a type of bond that is:

A

Funded by revenue from a specific project

216
Q

A bond with a coupon rate lower than the yield to maturity is priced at a:

A

Discount to its par value

217
Q

Which bonds typically pay a lower yield - revenue bonds or GO bonds?

A

Because GO bonds are backed by the full faith and credit of the issuing municipality they are viewed as safer than revenue bonds and therefore pay a lower yield.

218
Q

A New York resident purchases municipal bonds issued by a county in California. At what levels will the interest income on the bond be taxed?

A

The interest income will be tax-free at the federal level. However, because an investor buys an out-of-state bond, the investor will have to pay state and local tax on the interest income.

219
Q

An investor in the 33% tax bracket purchases a 6% municipal bond. What is the taxable equivalent yield?

A

The fully taxable-equivalent yield is used to compare the yield on a tax-exempt bond, such as a municipal bond, to the yield on a fully taxable bond. To calculate the taxable equivalent yield, divide the tax-free yield of the municipal bond by (100% minus the tax rate).

In this case: 6%/ (100% - 33%) = 8.96%

220
Q

Municipal bonds are bought and sold in the

A

OTC market.

221
Q

Define:

bond anticipation note

A

A short-term security issued by a municipality to generate interim financing in anticipation of a future sale of municipal bonds.

222
Q

Define:

debt limit

A

The amount of GO debt that a municipality can have outstanding.

223
Q

Define:

net debt per capita

A

A measure of a municipality’s relative risk because it divides the debt of the municipality by the number of potential taxpayers.

224
Q

Define:

net debt-to-assessed valuation

A

A measure of a municipality’s relative risk comparing the amount of debt borne by the municipality to the assessed valuation of homes.

225
Q

Define:

original issue discount muni

A

A municipal bond that was issued in the primary market for a discount. Unlike other discount bonds, the annual accretion on an OID muni is not taxed.

226
Q

Define:

rate covenant

A

The promise made by a municipality in its trust indenture for revenue bonds to charge high enough rates to service the debt.

227
Q

Define:

Western account

A

Also referred to an a divided account, it is a type of municipal bond underwriting where each syndicate member is only liable for its own allocations.

228
Q

Define:

coverage ratio

A

A municipal revenue bond debt ratio that indicates how many times the annual revenue from the project will cover debt service. Generally, a ratio of 2:1 is considered adequate for a typical revenue bond issuance.

229
Q

Define:

extraordinary call

A

A provision in some bond issues that allows the issuer to redeem the bonds prior to maturity if some extraodinary event occurs that would impact the company’s ability to generate the necessary revenue that supports the bond.

230
Q

Define:

fidelity bond

A

Insurance coverage required by the MSRB for municipal securities firms.

231
Q

Define:

flow of funds

A

Found in the indenture of a municipal revenue bond, it details the priority for distributing the revenue that has been generated by the project.

232
Q

Define:

member order

A

In a municipal bond issuance, an order entered by a sydnicate member for its own inventory or related accounts. Typically, these have lowest priority compared to all other orders and are therefore filled last.

233
Q

Define:

when-issued security

A

The term used to decribe a security that has been authorized but not yet issued.

234
Q

Define:

Serial maturity

A

A bond issue that matures over many different intervals rather than one single maturity date.

235
Q

Define:

insurance covenant

A

The promise made by a municipality in its trust indenture for revenue bonds to maintain insurance on the facility.

236
Q

Define:

closed-end covenant

A

A clause in a trust indenture that states that any new debt secured by the assets must have a lower claim on those assets compared to the original bondholders.

237
Q

Define:

open-end covenant

A

A clause in a trust indenture that states that any new debt secured by the assets will have the same claim on those assets as the original bondholders.

Series 7 Top-off Exam (8 decks)

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