Unit 6: Muni. Debt Securities

Question 1

Primary objective of muni bonds?

Answer 1

tax-free interest income, good for client in higher tax bracket

Question 2

Muni bonds are exempt from which tax?

Answer 2

Federal

Question 3

When are muni bonds tax-free at all levels?

Answer 3

in-state bonds (triple tax free; federal, state, local)

Question 4

Muni bonds capital gains tax-free?

Answer 4

NO

Question 5

Statutory Debt Limit

Answer 5

GO Bonds
protects taxpayers from excessive borrowing
EX: borrow 2% of FMV taxable property

Question 6

Adjacent Debt

Answer 6

GO Bonds
when multiple issuers jointly raise capital
EX: Kent and Sussex County issue bonds together
“Overlapping”
next to

Question 7

Coterminus Debt

Answer 7

GO Bonds
When issuers tax the same property
EX: Kent County and Dover City
“Overlapping”
inside

Question 8

Revenue Bonds

Answer 8

Int and principal paid from muni revenue
Not subject to statutory debt limits

Question 9

Revenue bond holder may prefer trust indenture that protects bond holders with…

Answer 9

Covenants
(not required)

Question 10

Rev Bonds backed by revenue and state taxes?

Answer 10

Double-Barrel: must use tax
Moral Obligation: may use tax

Question 11

Safest Revenue Bond

Answer 11

New Housing Authority Bonds

Question 12

Muni Bond Insurance

Answer 12

insurance company’s guarantee of the payment of principal and interest on a muni bond issue if the issuer defaults
insured bonds need to deliver proof of insurance
If failed, payments are made as originally scheduled (no lump sum)

Question 13

Sinking Fund

Answer 13

Issuer may facilitate a bond’s redemption.
More marketable

Question 14

Can a Muni pay a floating/variable interest rate?

Answer 14

Yes, and its price is stable
“Reset Bonds”

Question 15

Build America Bonds (BABs)

Answer 15

Muni pays federally taxable interest income but provides a federal tax credit for taxes paid.

Question 16

Primary Market (new issues) information source

Answer 16

The Bond Buyer
- 30-Day Visible Supply: $ of issues
- Placement Ratios: demand for muni
- Muni Price Index

Question 17

Secondary Market (trading date) information source

Answer 17

Electronic Municipal Market Access (EMMA)
- Trade Date & Disclosures
users: retail investors

Question 18

Negotiated Bid Underwriting

Answer 18

Muni selects bank (underwriter)

Question 19

Competitive Bid Underwriting

Answer 19

Muni -> notice of sale -> Syndicate Bids -> Award the Issue -> Distribute Bonds

Question 20

Distribute Bonds order of sale

Answer 20

Pro Golgers Dont Miss
- Pre-sale
- Group
- Designated
- Member

Question 21

Western Account

Answer 21

Syndicate relationship where if you do not sell all your promised bonds you are the only one on the hook (‘takes down”).
No shared liability

Question 22

Eastern Account

Answer 22

Shared Liability, if you dont sell all promised bonds, liability shares with other members of the syndicate.

Question 23

Who is paid first in a net revenue pledge?

Answer 23

1. Operations and maintenance
2. Interest payments

Question 24

Bond Contract

Answer 24

Trust Indenture w/ trustee
Flow of funds statement

Question 25

Official Statement

Answer 25

discourse (like a prospectus) not required because munis are exempt securities

Question 26

Legal Opinion

Answer 26

Prepared by bond counsel to validate bond's TAX EXEMPT status and muni legal authority to issue them. Prefer NON-QUALIFIED

Question 27

Muni bonds are sold on a when-issued basis, the only item to be included on the trade confirmation is the...

Answer 27

interest rate

Question 28

Muni bonds trade on:

Answer 28

OTC

Question 29

Muni serial bonds (tranches) are quoted:

Answer 29

on YTM

Question 30

nominal or subject quote is:

Answer 30

Non-firm

Question 31

Muni round lot has a face amount of:

Answer 31

$100,000

Question 32

A broker's broker provides:

Answer 32

anonymity

Question 33

A muni bond trade is reported to:

Answer 33

RTRS (real time reporting system) within 15 minutes

Question 34

Muni to Corp Bond calculation

Answer 34

Muni % / (1 - tax %) = Corp %

Question 35

Corp to Muni Bond calulation

Answer 35

Corp % x (1 - tax %) = Muni %

Question 36

Auction Rate Securities (ARS)

Answer 36

long term debt securities with int rates that are periodically reset through autions

Question 37

ARS int rate tied to:

Answer 37

short term rates

Question 38

ARS issued and rated as:

Answer 38

long term bonds

Question 39

ARS priced and traded as:

Answer 39

short term bonds

Question 40

ARS securities are auctioned at:

Answer 40

par value

Question 41

Int paid on ARS is set by the:

Answer 41

clearing rate: lowest bid rate where all are sold

Question 42

Main risk of ARS:

Answer 42

failed auction (no clearing rate)

Question 43

Broker-brokers' clients are:

Answer 43

other muni dealers and institutions (not retail)

Question 44

Bonds that are "held firm for 1 hour w/ a 5-min recall" means:

Answer 44

Fixed price for 1 hour Broker can pull offer within 5 mins warning

Question 45

unds set aside each year to pay off a muni bond at maturity are:

Answer 45

Sinking Fund more attractive ,lower risk, lower coupon

Question 46

Can muni bonds be delivered w/o legal opinion?

Answer 46

Yes

Question 47

What is a 6% J&D 15 muni bond?

Answer 47

6% coupon pays June/December 15th of month is paid

Question 48

Corp & Munis accrue:

Answer 48

30-day months 360 days a yr T + 2

Question 49

Government Bonds accrue:

Answer 49

actual days per month 365 days per year T + 1

Question 50

Accrued int per month (muni) December

Answer 50

Dec 1-14: 14 days Dec 15-30: 16 days

Question 51

Premium Bonds (cost basis)

Answer 51

Amortize

Question 52

Discount Bonds (cost basis)

Answer 52

Accrete

Question 53

Discount bonds taxation:

Answer 53

New issues (OID): untaxed Secondary Market: taxed

Question 54

Defeased Bond

Answer 54

muni escrows government securities sufficient to cover the interest and principal payments of a bond until maturity: "escrowed to maturity" The debt is no longer a liability of the muni

Question 55

When a new bond is issued, interest will begin accruing on which date?

Answer 55

Dated date