Municipal Underwritings Flashcards
All of the following statements are true regarding the municipal financial advisor in competitive bid underwritings EXCEPT:
A. the financial advisor helps the issuer structure a new bond offering
B. the issuer pays the financial advisor
C. the financial advisor is prohibited from bidding on the issue
D. Due to the tax implications, the financial advisor is usually a CPA firm
The best answer is D.
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. Financial advisors are municipal broker-dealers - not CPA firms.
On a new issue of municipal bonds, the bond counsel will evaluate all of the following documents EXCEPT:
A. Enabling Legislation
B. Feasibility Study
C. Internal Revenue Regulations
D. Relevant Judicial Decisions
The best answer is B.
The bond counsel examines new municipal issues to render an opinion on the validity, legality, and tax exempt status of the issue. To make its determination, the counsel will examine enabling legislation, relevant judicial decisions, and Internal Revenue Service rulings.
The bond counsel does not examine the Feasibility Study. This is an economic forecast for the project, comparing projected revenues against projected costs. Bond attorneys make legal evaluations, not economic ones!
The bond counsel for a new municipal issue will opine on all of the following EXCEPT:
A. compliance of the issuer with Treasury arbitrage regulations
B. fairness and reasonableness of the reoffering yields
C. legal validity of the issue as a binding obligation on the issuer
D. Federal and Local tax status of the interest income to be received by holders of the issue
The best answer is B.
Municipal bond counsels give an opinion on the validity, legality and tax exempt status of a new municipal issue. The do not give an opinion of the fairness of the yield on that issue (remember, lawyers do not give economic opinions).
Which statement is TRUE regarding new municipal offerings?
A. Highway bonds are typically offered through competitive bids
B. Political subdivision municipal bond issues are usually offered through competitive bids
C. County bonds are usually offered through negotiated underwritings
D. School District bonds are usually offered through negotiated underwritings
The best answer is B.
Most general obligation issues are sold through competitive bid while revenue bond issues are typically sold through negotiated offerings. Political subdivision issues are general obligation bonds of cities, counties, and townships and school districts. Enterprise activity issues are revenue bond issues where revenues from an enterprise pay for the debt service on the issue such as highways and airport bonds.
Which statement is TRUE regarding new municipal offerings?
A. Bridge Authority municipal bond issues are usually offered through competitive bids
B. G.O. issues are usually offered through competitive bids
C. School district municipal bond issues are usually offered through negotiated underwritings
D. Turnpike Authority bond issues are usually offered through competitive bids
The best answer is B.
Most general obligation issues are sold through competitive bid while revenue bond issues are typically sold through negotiated offerings. School district bond issues are general obligation bonds. Authority bond issues, such as a turnpike authority or a bridge authority, are revenue bonds.
A municipality will solicit bids from interested persons for a new bond issue by publishing a(n):
A. Official Statement
B. Prospectus
C. Official Notice of Sale
D. Tombstone
The best answer is C.
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.
There is no prospectus requirement for municipal issues because these are exempt securities (exempt from the provisions of the Securities Acts). Hence, the tombstone advertisement rules under the ‘33 Act do not apply to municipals, as well.
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.
Which of the following information would NOT be found in the Official Notice of Sale?
A. par value of the bonds
B. reoffering yield of the bonds
C. maturities of the bonds
D. income source backing 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 and the reoffering yield on the bond. Both of these are 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. When the bonds are delivered to the winning bidder, the price is “marked-up” to give the underwriter a profit upon reselling the bonds to the public. When the price is “marked-up,” the reoffering yield on the bonds drops below the stated interest rate on the bonds.
All of the following information would be found in the Official Notice of Sale EXCEPT:
A. Bond Type
B. Bond Maturities
C. Bond Interest Rates
D. Bond Attorney Name
The best answer is C.
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.
What is NOT a determining factor when making a competitive bid for a new municipal issue?
A. Type of income source backing the bonds
B. Yields of similar bonds in the market
C. Maturities of the bonds
D. Par value of the bonds
The best answer is D.
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.
Which of the following is NOT a determining factor when making a competitive bid for municipal issues?
A. Maturities of the bonds
B. Yields in the market
C. Type of bonds
D. Amount of good faith check
The best answer is D.
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 issue
All of the following are reasons why the good faith check may be returned EXCEPT the:
A. issuer rejects all bids
B. check is improperly prepared
C. underwriter loses the bid
D. underwriter wins the bid
The best answer is D.
If the underwriter wins the bid, the issuer keeps the good faith check and applies it to the balance due, once the bonds are printed and ready for delivery. The check will be returned if it is improperly prepared or if the bid is rejected.
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.
The contract between an issuer and a bidder to buy a municipal issue is called the:
A. Bond Buyer Worksheet
B. Official Statement
C. Bid Form
D. Trust Indenture
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.
All of the following are included in a competitive bid EXCEPT:
A. reoffering yields
B. stated rates of interest
C. premiums or discounts
D. dollar amount of bid
The best answer is A.
The reoffering yields are not in the syndicate bid - 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; the total dollar amount being bid; and the Net Interest Cost (if it is an NIC - Net Interest Cost bid) or the True Interest Cost (if it is a TIC - True Interest Cost bid).
