Section 103 Unit 2b

Question 1

Two Types of Municpal Debt Obligations

Answer 1

General Obligation Bonds and Revenue Bonds

Question 2

General Obligation Bonds (Gos)

Answer 2

Issued to raise money to benefit the community. Interest and obligation must be paid by the revenues of the municipal issuer.

Question 3

Revenue Bonds

Answer 3

More risky than GOs and, therefore, higher yields. Funds municipal facilities that generate sufficient income to pay back the bonds plus interest.

Question 4

Private Activity or Private Purpose Bonds

Answer 4

Is part of a state or local government bond issue for which more than 10% of the proceeds of the issue are to be used for a private business use.

Question 5

Insured Municipal Bonds

Answer 5

Municipal bonds may insure against default to help increase the bond rating, which will lower the coupon rate on the issue.

Question 6

Municpal Bond Taxes

Answer 6

GOs and Revenue bonds interest is not subject to federal taxes but if the bond is sold the gains are. Taxable on state and local levels, unless the bond is purchased by a resident of the issuing state and the bond indenture agreement allows for that exclusion.

Question 7

Taxable Equivalent Yield Formula

Answer 7

TEY= Municipal Coupon rate/ 1 - marginal tax rate

Question 8

After-Tax Yield Formula

Answer 8

After-tax yield = Pretax return x (1 - marginal tax rate)

Question 9

Convertible Bonds

Answer 9

Convert to a fixed number of shares of company stock. Pay lower interest rate than nonconvertible bonds. The price for convertible is less volatile than common stock.

Question 10

Conversion Ratio

Answer 10

The stock price at which a convertible bond can be exchanged for shares of the issuer’s common stock

Conversion ratio = Par value of convertible security / conversion price

The higher the conversion price, the less the shares are received at the date of conversion.

Question 11

Conversion Value Formula

Answer 11

Conversion value - conversion ratio x market price of common stock.
The conversion value represents the value of the bond if it were converted on the basis of current market conditions.

Question 12

Zero-Coupon Bonds

Answer 12

Sold at a deep discount aka Original Issue Discount (OID). Phantom income taxable.

Question 13

Types of Foreign Bonds

Answer 13

1) Those payable in U.S. Dollars

2) Those payable in foreign currency (exchange rate risk)

Question 14

Yankee Bonds

Answer 14

Foreign bonds payable in U.S. Dollars.

Question 15

Eurodollar Bonds

Answer 15

U.S. dollar paid bond, but do not have to be registered with the SEC because they are issued and traded outside the U.S.

Question 16

Promissory Note

Answer 16

A promise to pay a specific sum of money or a series of payments to others. Same as Bonds. Present value of a promissory note is found using TVM principles and discounting back future cash flows.