Municipal Underwritings

Question 1

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

Answer 1

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.

Question 2

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

Answer 2

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.

Question 3

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

Answer 3

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.

Question 4

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

Answer 4

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.

Question 5

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

Answer 5

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.

Question 6

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

Answer 6

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

Question 7

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

Answer 7

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.)

Question 8

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

Answer 8

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.

Question 9

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

Answer 9

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.

Question 10

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

Answer 10

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.

Question 11

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

Answer 11

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.

Question 12

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

Answer 12

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.

Question 13

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

Answer 13

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

Question 14

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

Answer 14

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.

Question 15

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

Answer 15

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.

Question 16

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

Answer 16

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.

Question 17

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

Answer 17

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.

Question 18

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

Answer 18

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.

Question 19

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

Answer 19

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.

Question 20

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

Answer 20

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.

Question 21

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

Answer 21

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.

Question 22

A divided syndicate is known as a(n):

A. Eastern Syndicate
B. Western Syndicate
C. Northern Syndicate
D. Southern Syndicate

Answer 22

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.

Question 23

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

Answer 23

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.

Question 24

“The manager will credit each syndicate member based on sales of the issue allotted to the member and such credits extinguish liability against all securities that remain unsold by all members.”

The paragraph above would be found in a(n):

A. Eastern syndicate agreement
B. Western syndicate agreement
C. Bid Form
D. Official statement

Answer 24

The best answer is A.

An Eastern account is undivided as to selling responsibility and undivided as to liability. Since sales of bonds by each syndicate member are used to extinguish liability of the group as a whole, the account is an undivided, or Eastern account

Question 25

A syndicate member takes a 10% participation in a $15,000,000 issue set up as an Eastern account. At the termination of the syndicate, $2,000,000 remains unsold in the account. The syndicate member sold $1,500,000. The syndicate member’s remaining liability is:

A. 0
B. $50,000
C. $100,000
D. $200,000

Answer 25

The best answer is D.

In an Eastern account, the syndicate member’s liability is his percentage of all unsold securities. The actual sales by that member have no bearing on remaining liability. Total unsold = $2,000,000 x 10% = $200,000. Note that if this were a Western (divided) syndicate, then his selling liability would have been extinguished.

Question 26

All of the following statements are true regarding municipal new issue syndicates EXCEPT:

A. the same municipal dealers typically join together in a syndicate to bid
B. if the syndicate is bidding on a larger than normal issue, it may join with another syndicate to bid
C. the manager can force syndicate members to increase the size of their commitment to bid on a larger than normal issue
D. the manager can allow additional municipal dealers into the syndicate to bid on a larger than normal issue

Answer 26

The best answer is C.

To bid on a larger than normal offering, the manager of the syndicate can request that syndicate members take larger participations (but cannot force them to do so), can add additional syndicate members to the syndicate, or can join forces to bid with another syndicate.

Question 27

Municipal syndicate expenses are allocated:

I by the manager
II by the issuer
III based upon sales of the issue made by each member
IV based upon the underwriting participation of each member

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 27

The best answer is B.

Municipal syndicate expenses are usually allocated by the manager among syndicate members based upon underwriting participation of that member. This will be detailed in the Syndicate Agreement.

Question 28

The difference between bid and production on competitive bid municipal issues is known as the:

A. Takedown
B. Spread
C. Selling Concession
D. Additional Takedown

Answer 28

The best answer is B.

The spread on a competitive bid municipal issue is the difference between the dollar amount bid (which is usually par value) and the “production” - the expected dollar amount to be realized upon reoffering the bonds at a premium over par.

Question 29

A hospital revenue bond issue is being underwritten on a negotiated basis. The offering consists of $100,000,000 par value of term bonds. The underwriter has agreed to a spread of $50 for each $5,000 bond. The manager has set the additional takedown at $20.00 per bond and the selling concession at $22.00 per bond. After the offering is completed, the issuer will receive:

A. $80,000,000
B. $98,160,000
C. $98,500,000
D. $99,000,000

Answer 29

The best answer is D.

The spread is $50 per $5,000 of bonds, so the issuer receives $4,950. There are $100,000,000/$5,000 = 20,000 bonds in the offering.
20,000 bonds x $4,950 per bond = $99,000,000.

Note that the additional takedown and the selling concession are unneeded pieces of information here. These are included within the spread. The spread is the gross compensation to the syndicate ($50 in this example). The total takedown is the amount of the spread that is given to a syndicate member who sells a bond to the public. It is the total of the additional takedown plus the selling concession = $20 + $22 = $42. Thus, the manager retains $8 of the spread as a management fee for each bond sold by the syndicate.

If a selling group member finds a customer, out of the total takedown of $42, the syndicate member gives up the $22 selling concession to the selling group member, leaving the syndicate member to earn $20 on that sale (the additional takedown).

Question 30

A hospital revenue bond issue is being underwritten on a negotiated basis. The offering consists of $20,000,000 par value of term bonds. The underwriter has agreed to a spread of $30 for each $5,000 bond. The manager has set the additional takedown at $12.00 per bond and the selling concession at $15.00 per bond. After the offering is completed, the issuer will receive:

A. $19,880,000
B. $19,892,000
C. $19,940,000
D. $20,000,000

Answer 30

The best answer is A.

The spread is $30 per $5,000 of bonds, so the issuer receives $4,970. There are $20,000,000/$5,000 = 4,000 bonds in the offering.
4,000 bonds x $4,970 per bond = $19,880,000.

Note that the additional takedown and the selling concession are unneeded pieces of information here. These are included within the spread. The spread is the gross compensation to the syndicate ($30 in this example). The total takedown is the amount of the spread that is given to a syndicate member who sells a bond to the public. It is the total of the additional takedown plus the selling concession = $12 + $15 = $27. Thus, the manager retains $3 of the spread as a management fee for each bond sold by the syndicate.

If a selling group member finds a customer, out of the total takedown of $27, the syndicate member gives up the $15 selling concession to the selling group member, leaving the syndicate member to earn $12 on that sale (the additional takedown).

Question 31

The “total takedown” in a municipal underwriting is the:

A. additional takedown plus the selling concession
B. additional takedown minus the selling concession
C. spread minus the reallowance
D. spread minus the additional takedown

Answer 31

The best answer is A.

The total takedown in a municipal offering is the selling concession plus the additional takedown. A syndicate member who sells to a selling group member earns the additional takedown, giving up the selling concession to the selling group member. If that syndicate member sells to the public directly, he also keeps the selling concession (so he earns the total takedown).

Question 32

A hospital revenue bond issue is being underwritten on a negotiated basis. The offering consists of $100,000,000 par value of term bonds. The underwriter has agreed to a spread of $50 for each $5,000 bond. The manager has set the additional takedown at $20.00 per bond and the selling concession at $22.00 per bond. If a syndicate member sells a $5,000 par value bond directly to the public, the syndicate member earns:

A. $20.00
B. $22.00
C. $42.00
D. $50.0

Answer 32

The best answer is C.

When selling a bond directly to the public, a syndicate member earns the “Total Takedown,” which is the total of the additional takedown and the selling concession. The additional takedown is $20 and the selling concession is $22, so the syndicate member earns $42.

Question 33

The spread on a new municipal offering is set at 1 1/4 point. The selling concession is 3/8 point and the additional takedown is set at 1/2 point. If a syndicate member sells the issue directly to the public, how much will he earn?

A. 3/8 point
B. 1/2 point
C. 7/8 point
D. 1 1/4 point

Answer 33

The best answer is C.

When a municipal syndicate member sells to the public, he earns the “total takedown,” which is the total of the selling concession plus the additional takedown. Since the selling concession is 3/8 point and the additional takedown is 1/2 point, the total takedown is 7/8 point.

Question 34

After the bid is won in a municipal underwriting, a syndicate member that places an order with the manager for a selling group member would earn the:

A. Spread
B. Concession
C. Total takedown
D. Additional Takedown

Answer 34

The best answer is D.

The takedown (also called the “total takedown”) is the discount given by the manager to the syndicate members. This amount is earned by the syndicate member when he or she sells a bond directly to the public. The takedown consists of 2 pieces: the selling concession and the additional takedown. When a syndicate member sells a bond to the public, both pieces are earned. If a selling group member found the customer for the bond, the syndicate member gives up the selling concession to the selling group member, leaving the syndicate member with the additional takedown only on that sale.

Question 35

A municipal syndicate is performing a negotiated underwriting of a revenue bond issue. The additional takedown is set at 1 point. The selling concession is 3/4 point. $1,000,000 of the bonds are placed by a selling group member. On this sale, the syndicate will earn:

IA. $1,750
B. $7,500
C. $10,000
D. $17,500

Answer 35

The best answer is C.

When a municipal syndicate member sells to the public, he earns the “total takedown,” which is the total of the selling concession plus the additional takedown. In this case, the syndicate member does not earn the total takedown because the bonds were sold through a selling group member. Out of the total takedown of 1 3/4 point, a selling concession of 3/4 point is given up to the selling group member, leaving the syndicate with the additional takedown of 1 point = 1% of $1,000,000 = $10,000.

Question 36

The spread on a new municipal offering is set at 1 1/4 points. The selling concession is 3/8 point and the additional takedown is set at 1/2 point. If a selling group member places an order for the issue, how much will the syndicate earn on that sale?

A. 0
B. 3/8 point
C. 1/2 point
D. 7/8 point

Answer 36

The best answer is C.

When a municipal syndicate member sells to the public, he earns the “total takedown,” which is the total of the selling concession plus the additional takedown. In this case, the syndicate member does not earn the total takedown because the bonds were sold through a selling group member. Out of the total takedown of 7/8 point, a selling concession of 3/8 point is given up to the selling group member, leaving the syndicate with the additional takedown of 1/2 point.

Question 37

The spread on a new municipal offering is set at 3/4 point. The selling concession is 1/4 point and the additional takedown is set at 3/8 point. If a selling group member places an order for the bond, how much will the syndicate member earn on that sale?

A. 0
B. 1/4 point
C. 3/8 point
D. 5/8 point

Answer 37

The best answer is C.

When a municipal syndicate member sells to the public, he earns the “total takedown,” which is the total of the selling concession plus the additional takedown. In this case, the syndicate member does not earn the total takedown because the bonds were sold through a selling group member. Out of the total takedown of 5/8 point, a selling concession of 1/4 point is given up to the selling group member, leaving the syndicate with the additional takedown of 3/8 point.

Question 38

The selling concession in a municipal offering is the discount given to:

A. syndicate members
B. selling group members
C. non members of the underwriting group
D. financial institutions

Answer 38

The best answer is B.

The selling concession is the discount given by the manager to the selling group members who place orders for the bonds.

Question 39

A sewage treatment revenue bond issue is being underwritten on a negotiated basis. The offering consists of $50,000,000 par value of term bonds. The underwriter has agreed to a spread of $45.00 for each $5,000 bond. The manager has set the additional takedown at $20.00 per bond and the selling concession at $22.00 per bond. If a selling group member sells a $5,000 par value bond directly to the public, the selling group member earns:

A. $5.00
B. $20.00
C. $22.00
D. $42.00

Answer 39

The best answer is C.

When selling a bond directly to the public, a selling group member earns the selling concession of $22.00.

Question 40

A municipal syndicate is reoffering $4,000,000 of G.O. bonds. At the termination of the order period, the manager tallies the following orders:

Member: $2,000,000 Group: $2,000,000
Designated: $2,000,000 Pre-Sale: $2,000,000

Assuming that regular priority provisions are followed, which orders will be filled?

A. Pre-Sale-$2,000,000, Designated-$2,000,000

B. Pre-Sale-$1,000,000, Group-$1,000,000, Designated-$1,000,000, Member-$1,000,000

C. Designated-$2,000,000, Group-$2,000,000

D. Pre-Sale-$2,000,000, Group-$2,000,000

Answer 40

The best answer is D.

The normal priority for filling municipal orders is: Pre-Sale; Group; Designated; and finally Member orders. Since there is $4,000,000 of bonds to be sold, the $2,000,000 of pre-sale orders are filled; and the $2,000,000 of group orders are filled. The remaining orders would be canceled.

Question 41

A municipal syndicate is reoffering $3,000,000 of G.O. bonds. At the termination of the order period, the manager tallies the following orders:

Pre-Sale: $1,000,000 Designated: $1,000,000
Group: $1,000,000 Member: $1,000,000

Assuming that regular priority provisions are followed, which orders will be filled?

A. Pre-Sale-$1,000,000, Designated-$1,000,000, Member-$1,000,000
B. Pre-Sale,-$1,000,000, Group-$1,000,000, Designated-$1,000,000
C. Designated-$1,000,000, Group-$1,000,000, Member-$1,000,000
D. Pre-Sale-$750,000, Designated-$750,000, Group-$750,000, Member-$750,000

Answer 41

The best answer is B.

The normal priority for filling municipal orders is: Pre-Sale; Group; Designated; and finally, Member orders. Since there is $3,000,000 of bonds to be sold, the $1,000,000 of pre-sale orders are filled; the $1,000,000 of Group orders are filled; and the $1,000,000 of Designated orders are filled. The remaining orders would be canceled.

Question 42

New issue municipal “group” orders are filled:

A. after pre-sale orders, but before designated orders
B. after member orders, but before pre-sale orders
C. after designated orders, but before member orders
D. before all other orders

Answer 42

The best answer is A.

A municipal “group” order is placed by a syndicate member for the benefit of the group account. This order has priority after pre-sale orders. Following municipal group orders, the manager fills “designated” orders, which designate that the profit goes to a designated syndicate member, who can pass along part or all of that profit to the customer who placed the order as a discount. Finally, member orders at the takedown are filled.

Question 43

A syndicate member in a municipal underwriting wishes to place an order for the new issue bonds with the manager. The bonds are to be purchased for the member’s own portfolio. Under MSRB rules, an order for such a “related portfolio:”

A. must be accorded “Pre-Sale” status by the manager
B. must be disclosed to the manager as such at the time that the order is entered
C. must be entered as a “Designated” order by the member
D. cannot be entered by the syndicate member

Answer 43

The best answer is B.

Orders for the member’s own account or for “related portfolios” such as a municipal unit trust being formed by that member, must be disclosed as such to the manager at the time that the order is entered. Under MSRB rules, such orders are to be accorded last priority by the manager when filling orders. (The normal priority is “PGDM” - Pre-Sale; followed by Group Net; followed by Designated; followed by Member Takedown orders).

This rule makes sense because the issuer wants the broadest distribution of its bonds as is possible. It does not want the bonds to be retained (concentrated) in the hands of syndicate members (who could then potentially exert undue influence over the “market valuation” of that issuer’s bonds).

Question 44

A new issue municipal bond investor seeking information about an issuer’s financial condition would examine the:

A. Prospectus
B. Official Notice Of Sale
C. Trust Indenture
D. Official Statement

Answer 44

The best answer is D.

The Official Statement is the disclosure document, similar to a prospectus, for new municipal issues. Prospectuses are only required for non-exempt new issues under the Securities Act of 1933. Since municipals are exempt, there is no prospectus requirement. There is no legal requirement for issuers to prepare an Official Statement, but underwriters require them from issuers in order to perform due diligence on the issue; and to have a disclosure document that can be given to potential investors.

Question 45

Under MSRB rules, which of the following documents, if prepared, must be sent to the purchaser of a new issue municipal bond?

A. Tombstone
B. Official Statement
C. Official Notice of Sale
D. Legal Opinion

Answer 45

The best answer is B.

The MSRB requires that all purchasers of new issue municipal bonds receive a Final Official Statement, if one has been prepared. If the Final is not going to be prepared, but a Preliminary Official Statement is available, then this document must be sent. This document must be given to the customer no later than settlement of the transaction.

(The rather “odd” wording that the “Official Statement, if prepared, must be delivered to customers” stems from the fact that the MSRB has no regulatory authority over municipal issuers and cannot require that municipal issuers prepare Official Statements. So instead, this is done through the “back door.” The SEC wrote a rule stating that an underwriter cannot buy a new municipal issue unless it obtains a copy of the Official Statement (OS) and performs due diligence on it (so the OS will be prepared). And since the OS will be prepared, it will be delivered to each customer under the MSRB rule. You gotta love lawyers at work!)

Question 46

In a competitive bid municipal underwriting, which of the following statements are TRUE?

I The spread is disclosed
II The spread is not disclosed
III Each underwriter’s participation must be disclosed
IV There is no requirement to disclose each underwriter’s participation

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 46

The best answer is D.

In competitive bid municipal underwritings, the spread is not required to be disclosed, since it would be quite narrow. Only the reoffering yield and resultant dollar price is disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts.

Question 47

Which of the following must be disclosed to customers in negotiated municipal underwritings?

I Spread
II Initial offering price of each maturity
III Participation amount of each underwriter
IV Names of the Underwriters

A. I and II only
B. III and IV only
C. I, II, IV
D. I, II, III, IV

Answer 47

The best answer is A.

In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters (though this information is readily available) nor their participation amounts.

Question 48

The syndicate manager decides to decrease the reoffering yield on a competitively bid new issue by 25 basis points. This action:

A. is prohibited under MSRB rules
B. will decrease the dollar price per bond paid by customers
C. will increase the dollar price per bond paid by customers
D. will not affect the dollar price per bond paid by customers

Answer 48

The best answer is C.

In a competitive bid new issue, the manager sets the reoffering yield lower than the interest rate printed on the bonds. Thus, the syndicate will have a profit on the issue, since it buys the bonds at par at the stated interest rates; and reoffers them a lower yields to the public (with the price to the public being at a premium to par). The reoffering yield is not cast in stone - if market interest rates fall, the manager can drop the reoffering yields to match the market. This will further increase the price of the bonds to the public (and increase the profit to the syndicate as well).

Question 49

A municipal bond dealer gives a quote on a new issue 20 year, 4% General Obligation bond. The quote includes a 20 basis point mark-up. Because of the mark-up, which statements are TRUE?

I The dollar price of the bond will increase
II The dollar price of the bond will decrease
III The yield of the bond will increase
IV The yield of the bond will decrease

A. I and III
B. I and IV
C. II and III
D. II and IV

Answer 49

The best answer is B.

Any “mark-up” of a new issue purchased by a dealer at a net offering price less a concession, as defined by the MSRB as any remuneration in addition to the concession received by the dealer as a result of increasing the offering price on the securities. If the offering price of the bond is increased, the yield on the bond must decline.

Question 50

Which of the following statements are TRUE about new issue municipal selling practices?

I The customer must receive a copy of the Final Official Statement if one is printed
II The customer must receive a copy of the Agreement Among Underwriters
III If requested, the customer must receive the order priority provisions used by the manager
IV The customer must receive a confirmation showing the purchase price

A. II, III, IV
B. I, II, III
C. I, II, IV
D. I, III, IV

Answer 50

The best answer is D.

Under MSRB rules, a customer buying a new issue must receive a confirmation accompanied by a copy of the final Official Statement if one has been prepared. (If one has not been prepared by the issuer, there is no requirement to provide the document) If the customer requests, the order priority provisions must also be disclosed (Pre-Sale, Group, Designated, Member). There is no requirement to send the customer a copy of the Agreement Among Underwriters.

Question 51

Which of the following statements are TRUE about new issue municipal selling practices?

I The customer must receive a copy of the Final Official Statement if one is printed
II The spread must be disclosed to the customer if the issue is competitively bid
III If requested, the customer must receive the order priority provisions used by the manager
IV The customer must receive a confirmation showing the purchase price

A. II, III, IV
B. I, II, III
C. I, II, IV
D. I, III, IV

Answer 51

The best answer is D.

Under MSRB rules, a customer buying a new issue must receive a confirmation accompanied by a copy of the final Official Statement if one has been prepared. (If one has not been prepared by the issuer, there is no requirement to provide the document) If the customer requests, the order priority provisions must also be disclosed (Pre-Sale, Group, Designated, Member). Regarding spread disclosure, this is only required for negotiated underwritings - it is not required for competitively bid municipal underwritings.

Question 52

All of the following items are associated with a competitive bid offering of General Obligation bonds EXCEPT:

A. Official Notice of Sale
B. Official Statement
C. Legal Opinion
D. Prospectus

Answer 52

The best answer is D.

In a competitive bid offering of municipal bonds, the issuer solicits bids on the issue by placing an Official Notice of Sale in the Daily Bond Buyer. Once the bid is awarded, the bonds are printed with the winning interest rates and delivered to the winner, who pays the issuer for the securities. The securities are then reoffered by the winning syndicate. New issue disclosure on municipal bonds is given through the Official Statement; there is no prospectus requirement since these issues are exempt from the Securities Act of 1933. Any new long term municipal issue cannot be offered unless there is a legal opinion given on that security. The legal opinion is rendered by the Bond Counsel; who examines the validity of the issue, its legality, and tax exempt status.

Question 53

Information regarding new issue municipal offerings can be obtained from all of the following sources EXCEPT:

A. Best’s Ratings
B. Bond Buyer
C. Munifacts Wire
D. EMMA

Answer 53

The best answer is A.

Sources of information on municipal new issues include the MSRB’s EMMA (Electronic Municipal Market Access) website which includes copies of new issue Official Statements; the Daily Bond Buyer which publishes Official Notices of Sale along with general and statistical information about the municipal new issue market; and Munifacts, which is a web-based service of the Bond Buyer, publishing new issue and secondary market information. Best’s rates insurance companies for credit risk; it does not rate municipal issues.

Question 54

The Visible Supply includes:

I General Obligation Bonds
II Revenue Bonds
III Industrial Revenue Bonds
IV Bond Anticipation Notes

A. I only
B. I and II
C. I, II, III
D. II, III, IV

Answer 54

The best answer is C.

The Visible Supply includes all competitive bid and negotiated long term bond sales over the next 30 days; it does not include short term notes.

Question 55

The Placement Ratio has been steadily increasing over the last 30 days. This is an indication that: municipal

A. interest rates are likely to fall
B. interest rates are likely to rise
C. dealers have a decreasing inventory position
D. dealers have an increasing inventory position

Answer 55

The best answer is C.

The Placement Ratio measures how well the market is absorbing the output of new bonds. A high Placement Ratio means that most of the new bonds are “being placed” or resold. A low ratio means that the market is not absorbing the bonds, therefore they are sitting on dealers’ shelves.

Question 56

The Bond Buyer “20 Bond” index is composed of:

I General Obligation Bonds
II Special Tax Bonds
III Revenue Bonds
IV Industrial Revenue Bonds

A. I only
B. I and II only
C. III and IV only
D. I, II, III, IV

Answer 56

The best answer is A.

The Bond Buyer 20 Bond Index consists of 20 General Obligation bonds with 20 years to maturity, all rated A or better. These are non self-supporting debt. In contrast, Choices II, III, and IV are all self-supporting debts.

Question 57

Which Bond Buyer Index contains the highest quality issues?

A. 11 Bond Index
B. 20 Bond Index
C. Revdex
D. Munidex

Answer 57

The best answer is A.

The Bond Buyer 11 Bond index contains 11 G.O. bonds rated AA or better. The other indexes contain lower rated (A) issues.

Question 58

The Bond Buyer Revenue Bond Index contains:

A. 20 revenue bonds with 25 years to maturity, rated A or better
B. 25 revenue bonds with 20 years to maturity, rated A or better
C. 25 revenue bonds with 25 years to maturity, rated A or better
D. 25 revenue bonds with 30 years to maturity, rated A or better

Answer 58

The best answer is D.

The Revdex consists of 25 revenue bonds with 30 years to maturity, all rated A or better.