Municipal Underwritings Flashcards
All of the following statements are true regarding the municipal financial advisor in competitive bid underwritings EXCEPT the:
A. issuer pays the financial advisor
B. financial advisor will be the underwriter of the offering
C. financial advisor is usually a municipal broker-dealer
D. financial advisor helps the issuer structure a new bond offering
The best answer is B.
Financial advisors to municipalities are municipal broker-dealers familiar with the municipal marketplace. The financial advisor helps a municipality structure a competitive bid offering, receiving a fee from the municipality for this service. The firm that acts as the advisor attempts to get the lowest interest cost for the issuer. If the same firm were to be the underwriter, there is an inherent conflict of interest. As the underwriter, the firm wants to get the highest interest rate from the issuer, which makes the issuer easier to sell. The firm that acts as the financial adviser cannot be the underwriter in the deal - and this is true for both competitive bid and negotiated offerings.
The bond counsel will review which of the following concerning a new municipal issue?
I Feasibility
II Constitutionality
III Statutory Requirements
IV Legislative or Voter Approval Requirements
A. I and II only
B. III and IV only
C. II, III, IV
D. I, II, III, IV
The best answer is C.
The bond counsel reviews the legal and tax status of a new municipal issue; he does not examine the economic viability of the project. Thus, the bond counsel does not examine the feasibility study, but would examine the constitutionality of the issue (is it permitted in that State?); any statutory requirements that must be met; and any voter or legislative approval requirements that must be met before the issue can legally be sold.
The bond counsel will review all of the following concerning a new municipal issue EXCEPT:
A. Constitutionality
B. Statutory Requirements
C. Legislative or Voter Approval Requirements
D. Feasibility
The best answer is D.
The bond counsel does not look at the feasibility study - or how economically viable the project is. Rather, the bond counsel would consider the legal and tax status, the constitutionality of the issue, and any statutory requirements that must be met.
Which of the following municipal bonds are most often sold through negotiated sales?
I General Obligation
II Revenue
III Industrial Revenue
A. I only
B. III only
C. II and III
D. I, II, III
The best answer is C.
General obligation bonds are most often sold through competitive bidding. Revenue and industrial revenue bonds are most often sold through negotiated underwritings.
In order to solicit competitive bids for a new bond issue, the municipality will:
A. invite selected local investment banks and commercial banks to bid on the issue
B. publish an Official Notice of Sale in the Bond Buyer
C. hire a municipal financial advisor to find an appropriate underwriter
D. publish an Offering Notice in Bloomberg
The best answer is B.
Municipalities publish an “Official Notice of Sale” that gives the details of a new bond issue that the municipality will put up for auction in the near future. This is published in the Bond Buyer, and often in local newspapers as well. Any interested potential bidders can contact the municipality for more detailed information by requesting a copy of the “Preliminary Official Statement” - the disclosure document for municipal new issues.
All of the following information is found in the Official Notice of Sale EXCEPT:
A. maturities of the bonds
B. interest rate on the bonds
C. dated date on the bonds
D. award date of the bonds
The best answer is B.
The Official Notice of Sale gives the basic information needed to bid on a new bond offering. Included is the type of bond, dollar amount of each maturity, the names of the bond counsel and authorized person to conduct the bond sale at the township, among numerous other items such as the dated date of the issue (the date from which interest will start accruing) and the award date - the date that the winning bid will be announced. What is not known is the interest rate on the bonds - this is determined by the winning bidder. The lowest interest rate bid wins - and this interest rate is printed on the bonds when they are delivered to the winning bidder
All of the following are determining factors when making a competitive bid for municipal issues EXCEPT:
A. Maturities of the bonds
B. Amount of good faith check
C. Yields in the market
D. Type of bonds
The best answer is B.
When making a bid for an issue, municipal underwriters would consider the maturities of the bonds; current yields in the market; and the type of bonds being offered. The amount of the good faith check has no bearing on the bid. (Remember that in a competitive bid underwriting, the underwriter bids in terms of interest rate, with the lowest interest rates winning the bid. This is the lowest net interest cost to the issuer.)
Which of the following are determining factors when making a competitive bid for municipal issues?
I Type of income source backing the bonds
II Yields of similar bonds in the market
III Maturities of the bonds
IV Par value of the bonds
A. I and III
B. II and IV
C. I, II, III
D. I, II, III, IV
The best answer is C.
When making a bid for an issue, municipal underwriters would consider the maturities of the bonds; current yields of similar bonds in the market; and the type of bonds being offered (e.g., are they G.O., revenue, special tax, etc.) The par value of the bonds has no bearing on the interest rates to be bid.
A municipal syndicate is preparing to bid on a competitive General Obligation issue. To determine the bid, the syndicate will first determine the:
A. takedown
B. scale
C. coupon rate
D. discount or premium
The best answer is B.
The first step in determining a competitive bid is to write the scale - the interest rates at which the syndicate believes it can successfully reoffer the bonds. The spread is then factored into the interest rates to come up with the interest rates to be bid.
The Official Statement for a new municipal issue discloses that the issue consists of the following general obligation bonds:
Issue Size: $6,000,000
Dated Date: January 1, 2019
Due As Follows: January 1, 2020: $2,000,000
January 1, 2021: $2,000,000
January 1, 2022: $2,000,000
The issue structure represents how many bond years?
A. 2,000
B. 3,000
C. 6,000
D. 12,000
The best answer is D. To compute the number of bond years represented in a serial bond issue, the calculation is:
Years to Maturity x Number of $1000 Par Bonds = Bond Years
Years to Maturity # of $1k Par Bonds Bond Yrs.
1 2,000 2,000
2 2,000 4,000
3 2,000 6,000
Total 6,000 12,000
Therefore, the total number of bond years is 12,000.
The Official Statement for a new municipal issue discloses that the issue consists of the following general obligation bonds:
Issue Size: $20,000,000
Dated Date: January 1, 2019
Due As Follows: January 1, 2020: $10,000,000
January 1, 2021: $5,000,000
January 1, 2022: $5,000,000
The issue structure represents how many bond years?
A. 20,000
B. 35,000
C. 37,000
D. 40,000
The best answer is B.
To compute the number of bond years represented in a serial bond issue, the calculation is:
Years to Maturity x Number of $1000 Par Bonds = Bond Years
Years to Maturity # of $1k Par Bonds Bond Yrs.
1 10,000 10,000
2 5,000 10,000
3 5,000 15,000
Total 20,000 35,000
Therefore, the total number of bond years is 35,000.
The Official Statement for a new municipal issue discloses that the issue consists of the following general obligation bonds:
Issue Size: $12,000,000
Dated Date: January 1, 2019
Due As Follows: January 1, 2020: $4,000,000
January 1, 2021: $4,000,000
January 1, 2022: $4,000,000
The issue structure represents how many bond years?
A. 12,000
B. 16,000
C. 18,000
D. 24,000
The best answer is D.
To compute the number of bond years represented in a serial bond issue, the calculation is:
Years to Maturity x Number of $1000 Par Bonds = Bond Years
Years to Maturity # of $1k Par Bonds Bond Yrs.
1 4,000 4,000
2 4,000 8,000
3 4,000 12,000
Total 12,000 24,000
Therefore, the total number of bond years is 24,000.
The Official Statement for a new municipal issue discloses that the issue consists of the following general obligation bonds:
Issue Size: $20,000,000
Dated Date: January 1, 2019
Due As Follows: January 1, 2020: $10,000,000
January 1, 2021: $5,000,000
January 1, 2022: $5,000,000
The average life of the issue is:
A. 1.25 years
B. 1.75 years
C. 3.75 years
D. 4.25 years
The best answer is B.
The average life of a serial bond issue is:
# of Bond Yrs ----------------------- = Years Average # of $1k Par Bnds
35,000
———– = 1.75 Yrs Average
20,000
The computation of bond years and number of bonds is shown below:
Years to Maturity x Number of $1000 Par Bonds = Bond Years
Years to Maturity # of $1k Par Bonds Bond Yrs.
1 10,000 10,000
2 5,000 10,000
3 5,000 15,000
Total 20,000 35,000
The good faith check is typically:
A. 1% or 2% of the total par value of the bonds offered
B. 10% or 20% of the total par value of the bonds offered
C. 50% or 75% of the total par value of the bonds offered
D. 100% of the total par value of the bonds offered
The best answer is A.
The good faith check that must be deposited by interested bidders is typically 1% or 2% of the par value of the bonds.
The Bid Form submitted to the issuer in a competitive bid municipal bond underwriting is best described as a(n):
A. completed requisition for new bonds
B. executed contract between issuer and bidder
C. uncompleted contract to buy bonds
D. tender offer for the bonds
The best answer is C.
The bid form really is an uncompleted contract to buy the bonds. The bidder signs the form when the bid is submitted. If the bid is won, the issuer’s representative signs the form accepting the bid at the stated terms and deposits the good faith check. This is the completed contract to buy the bonds.
Which of the following, when executed, is the contract between an issuer and a bidder to buy a municipal issue?
A. Official Statement
B. Bid Form
C. Bond Buyer Worksheet
D. Trust Indenture
The best answer is B.
The bid form really is an uncompleted contract to buy the bonds. The bidder signs the form when the bid is submitted. If the bid is won, the issuer’s representative signs the form accepting the bid at the stated terms and deposits the good faith check. This is the completed contract to buy the bonds.
All of the following are included in a competitive bid EXCEPT:
A. stated rates of interest
B. premium over par if specified by bidder
C. discount below par if specified by bidder
D. names of the customers who will purchase the bonds from the underwriters
The best answer is D.
The interest rates to be printed on the bonds are in the bid. Also included are any premiums or discounts from par specified in the bid. A premium over par will reduce the Net Interest Cost (NIC) to the issuer; while a discount from par increases the Net Interest Cost to the issuer. The names of the customers who will buy the bonds from the underwriters is not in the bid; nor should it be of any interest to the issuer.
True interest cost is preferred over Net interest cost as a method for awarding bids because:
A. the computation is simplified
B. True Interest Cost considers the time value of money
C. the MSRB recommends its use
D. municipal underwriters require the method be used before they will place a bid
The best answer is B.
Net Interest Cost (NIC) is a simple mathematical average for awarding bids based on lowest interest cost. True Interest Cost (TIC) considers the “time value of money” and weights dollars paid earlier more heavily than dollars paid later.
To determine the Net Interest Cost on a bid for a new municipal issue, any premium is:
A. added to the interest cost
B. deducted from the interest cost
C. used to award the bid if there is a tie
D. not considered
The best answer is B.
Any premium paid by the bidder to the issuer is more money being paid to the issuer, hence it reduces the Net Interest Cost to the issuer, and thus is deducted when determining Net Interest Cost.
The “cover” in a municipal bid is the:
A. premium paid by the underwriter for the bonds
B. increment by which the next highest bid exceeds the winning bid
C. good faith deposit made when the bid is placed
D. additional deposit required once the winner is announced
The best answer is B.
The “cover” is the amount by which the next best bid’s interest cost exceeds the winning bid. The “covering bid” (next best bid) would be accepted by the issuer if the winner failed to complete the purchase of the bonds.
In a municipal securities underwriting, the agreement among underwriters is signed by the:
A. syndicate members
B. syndicate members and issuer
C. bond trustee and issuer
D. bond counsel and issuer
The best answer is A.
The agreement among underwriters is also known as the syndicate agreement. It establishes the syndicate account as either an Eastern or Western account and sets the terms for the running of the syndicate. It is signed by each syndicate member.
A divided syndicate is known as a(n):
A. Eastern Syndicate
B. Western Syndicate
C. Northern Syndicate
D. Southern Syndicate
The best answer is B.
A divided syndicate is known as a Western syndicate. Here, each member takes a preset dollar amount of the issue and is only responsible for selling that initial amount. This contrasts to an undivided syndicate agreement, which is an Eastern account. There is no such thing as a Northern or Southern account.
A syndicate member in a Western account takes $500,000 out of a $5,000,000 underwriting. At the termination of the syndicate, $750,000 of the issue remains unsold; while the member sold $400,000. This syndicate member’s remaining liability is:
A. $100,000
B. $350,000
C. $400,000
D. $750,000
The best answer is A.
A Western syndicate account is divided as to selling responsibility and divided as to liability. The member is only responsible for what the member was supposed to sell. The member is initially responsible for $500,000 - since the member sold $400,000, the member is only responsible for $100,000 of the $750,000 that remains unsold.
