Unit 6- Municipal Bonds Flashcards
What is a basis quote for a municipal bond?
Bond basis = yield to maturity
Note: 1 basis point is 1/100th of a percent
Define: Dollar Bond
A bond that is quoted as a regular percentage of its par.
Are municipal bonds exchange traded?
No….they are sold OTC
What was created under the Security Act Amendments of 1975?
The MSRB
Types of municipal bond quotations?
1) Bona Fide (firm)
- If a dealer posts a quote, they must be able to make good on the sale.
- A bona fide quote must reflect fair market value. It can also reflect the firms inventory. It does not have to be the best price.
2) Workable Indication
- The bid price a firm is willing to pay when they purchase a municipal bond from another firm. The bid may change as the market does.
3) Nominal (aka: subject) quote
- Is a dealers estimation of the market value of a security. MUST be labeled as such. Can be changed.
4) Holding quote (aka: out firm with recall quote)
- A deeper quote that is firm for a specific period of time (usually 1 hr). Can be recalled with a 5 min warning.
5) Bid wanted/Offer wanted
- Because municipal bonds are not exchange traded, investors often can the dealer for bid and quote prices.
Who hires the bond counsel?
The issuer.
Difference in maturity lengths between a municipal note and a municipal bond?
Municipal note = < 3 years
Municipal bonds = > 3 years
What is in a trust indenture (aka: bond resolution)?
- Rate covenants
- Maintenance covenants
- Insurance covenants
- Additional bond test (opened or closed)
- Sinking fund
- Catastrophe clause
- Flow of funds
- Books and records covenant
- Call features
Note: Trust indentures are not required, but are desired.
Another name for a variable rate municipal bond?
A “reset security” (because the interest rate resets)
The two types of variable rate municipal securities?
Variable rate demand obligations (VRDO)
- interest may be reset daily, weekly, monthly, or even semiannually.
- Key feature: the investors have the option to sell the bond back to the issuer at par, on any reset date.
Auction Rate Securities (ARS)
- Interest rates are reset by Dutch auction every 7, 14, 28, and 36 weeks.
- No new ARSs have been issued since 2007.
What document do municipal bonds offer, that is similar to a prospectus?
The Official Statement
How to calculate a municipalities Net Total Debt?
Total debt (all bonds issued, GO and Rev.)
- Self-supporting debt (Rev. bonds)
- Sinking fund accumulations
= Net Direct Debt
+ Overlapping debt
= Net Total Debt
Define: Debt Coverage Ratio?
Coverage = Available Rev / Debt Service Requirement
How is the cost basis of a municipal bond adjusted over time?
Purchased at a premium = Amortized
Purchased at a discount = Accreted
Are capital gains with a municipal bond tax free?
No…only the interest.
What municipal securities are subject to Alternative Minimum Tax?
Private purpose, and nonessential government service municipal bonds. (Example: industrial revenue bonds)
Items that add to alternative minimum tax?
- Private purpose municipal bonds.
- Research and development costs and excess intangible drilling costs of a DPP.
- State income and property tax, and interest on investments that do not generate income.
- Accelerated depreciation on investment property.
Taxable municipal bonds (2 types)?
Build America Bonds:
- Direct payment BAB
- Tax credit BAB
Does the MSRB regulate issues?
No…just forms and individuals involved in the municipal securities business.
Who enforced MSRB rules?
FINRA
Rules for records of associated people?
- Any change to U4/U5 must update in 30 days.
- Records must be kept for a minimum of three years after termination of an associated person.
Length if time a record must be kept?
Lifetime:
- Articles of incorporation, or a partnership agreement.
- Minutes of a board or partnership meeting.
- Records of stock certificates.
6 Year Records
- Blotters
- General ledger
- Customer ledgers
- Customer account records
- Customer complaints (note: FINRA only requires 4 yrs)
- Principal designation records
All other records are considered to be a 4 year record.
NOTE: All records must be kept READILY AVAILABLE for 2 yrs.
What is the “clearing rate”?
When a municipal bonds interest is reset at Dutch Auction, the new rate is called the clearing rate.
Do catastrophe call clauses have to be stated on the customer confirmation?
No…only calls with a defined date.
Bring the sale of a bond, is the current yield stated?
No…but the yield to maturity or clients call is.
What is a municipalities collection ratio?
Collection ratio = property tax collected / property tax assessed
This is a measure used to see a municipalities ability to cover its GO debt obligations.
What is the full and fair disclosure document (similar to a prospectus) of the municipal securities world?
The Official Statement
Define: Bond Placement Ratio
Reported weekly:
$ NEW issues sold / $ NEW issues unsold
It’s a ratio of of new issues sold to those that didn’t sell. Basically it shows the success of the underwriters.
What organization insures general obligation bonds?
National Public Finance Guarantee Corp. and AMBAC
Can a broker dealer act as financial advisor and underwrite for a municipal security issuer?
No! This is true regardless of it it’s a competitive bid or negotiated underwriting.
IF an exception is made, the broker can only collect fees as an advisor, and can not profit from the underwriting.
