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Series 7 > Munis > Flashcards

Munis Flashcards

1
Q

For an investor in the 37% federal income tax bracket, the tax-equivalent yield of a general obligation municipal bond with a coupon rate of 4.17% is _____

A
  1. 62%
    - Tax equivalent yield = Coupon rate / (100% - tax bracket)

“The computation for tax-equivalent yield is done by dividing the coupon rate by (100% - tax bracket). In this question, that is 4.17% ÷ (100% - 37%) = 4.17% ÷ 63%. That equals 6.62%.”

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2
Q

Is the bond contract or bond resolution a more expansive document?

A

Bond contract is more expansive

-The bond contract contains the bond resolution (aka trust indenture)

” The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.”

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3
Q

T/F: The bond contract contains the bond resolution as well as other security agreements and laws in force at time of issuance

A

True

-Bond contract contains bond resolution

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4
Q

[Munis] Out-firm with recall quote

A

Quote is good for roughly one hour then recalled

“A municipal securities dealer may quote a bond price that is firm for a certain time. This is called an out-firm with recall quote. Generally, these quotes are firm for an hour (or half hour) with a five-minute recall period. During this time, the municipal dealer cannot offer those bonds to anyone else—they are under the control of your firm.”

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5
Q

T/F: The official statement is the disclosure document used in new muni offerings

A

True

-Is the disclosure document

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6
Q

Does the legal opinion evaluate the tax exempt status of a muni issue?

A

Yes

-Looks at legality as well as tax exempt status

“A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality”

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7
Q

T/F: Prior to issuing any municipal bond, issuers commission attorneys known as “bond counsels” to render legal opinions.

A

True

Bond counsel renders legal oponion

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8
Q

What is the term for the attorneys who render the legal opnion of a bond issue?

A

The bond counsel

-They issue the legal opnion which deals with the tax exempt status and legality of the offering

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9
Q

The tax exemot status of a muni offering would be found in what document?

A

The legal opinion

-It contains the tax exempt status and legaility of the offering

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10
Q

Does the official statement contain info on the creditworthiness of the issue?

A

Yes

Contains the issue’s creditworthiness

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11
Q

Who is responsible for preparing the official statement of a new muni issue?

A

The issuer

-Although underwriter may assist

“While a broker-dealer acting in an underwriting capacity or in an advisory capacity may assist in preparing the official statement, it is considered to be the responsibility of, and prepared by, the issuer. “

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12
Q

T/F: In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well.

A

True

-Interest exempt from fed taxes

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13
Q

A muni revenue issue’s flow of funds statement would be found in what document?

A

In the bond contract

Flow of funds would be in bond contract

(Bond contract is the one that contains the bond resolution aka trust indenture)

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14
Q

T/F: Interest received on a California GO bond bought by a San Francisco resident would be exempt from state and federal income taxes.

A

True

Exempt from both
It’s a muni bond

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15
Q

Certain revenue bonds called ____ are baked by a leaseback agreement

A

Lease rental bonds

“Certain revenue bonds—called lease-rental bonds—are secured by a leaseback arrangement. For example, the state may set up an agency to construct a new office complex to house all state agencies. This authority issued the bonds. Once the facility is built, the state leases the complex from that authority. The bonds are backed by the lease payments.”

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16
Q

T/F: [munis] The bond resolution (aka bond contract) contains both the requirement for the municipality to properly keep the facilities books and reporting requirements regarding revenues collected.

A

True, contains both

“The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant”

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17
Q

T/F: The bond contract (aka bond resolution) contains the terms of the rate covenant

A

True, contains terms of rate covenant

(Also contains conditions of the maintenance covenant)

“The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant.”

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18
Q

A munis total debt is made up of direct debt and overlapping debt, what do these two terms mean?

A

Direct debt is debt issued by the municipality, and overlapping debt is the municipality’s share of debt issued by authorities that draw revenues from the same sources as the municipality

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19
Q

A 4% municipal bond maturing in 2040 has a current yield of 4.4% with a yield to maturity of 4.7%. What is the basis of this bond?

A

4.7%

Basis means YTM

“The basis of a municipal bond is its yield to maturity (YTM). The terms are used interchangeably. Therefore, in this question, the basis is the 4.7% stated as the YTM. There will be some questions on the exam similar to this where no math is involved. Just be sure to know your definitions”

20
Q

If a big company wants to put its HQ in a municipality, and the muni says “we’ll pay to build the HQ, then lease it to you and use those payments to pay off the debt from construction” what kind of bond would be used?

A

Industrial development bond or industrial revenue bond

21
Q

If a muni wants to build a bridge but is afraid the toll revenue from the bridge might not be enough to pay debt service, what type of revenue bond would it use?

A

A moral obligation bond

  • First line of debt service is revenue from bridge
  • If revenue form bridge isn’t enough, muni will still pay back debt service
22
Q

Trust indentures, which are legally binding contracts between bond issuers and trustees that represent bondholder interests, are present with revenue bonds, but not with _____ bonds

A

GO bonds

No trust indenture for GO bonds

22
Q

T/F: In some cases, such as with revenue bonds, a bond indenture is used instead of a bond resolution to define the legal terms of the bond issue and its financing.

A

True

Bond indenture sometimes used instead of bond resolution

22
Q

Are trust indentures present with GO bonds?

A

No

Only revenue bonds

22
Q

Are trust indentures present with revenue bonds?

A

Yes

But not GO bonds

23
Q

A legal opinion that has restrictions placed on it by the municipality’s bond counsel is called _____

A

A qualified opinion

Like there’s qualifications to it

“A qualified opinion is one where the bond counsel to the municipality places certain legal restrictions (qualifications) on the issue that must be disclosed to purchasers. An unqualified opinion has no restrictions.”

24
Q

T/F: Interest on Ginnie Maes is taxed at all levels

A

True

“Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels”

25
Q

T/F: Both Ginnie Maes and T-notes are quoted in 32nds.

A

True

T notes and Ginnie Mae in 32nds

26
Q

Which of the following bonds may be secured by a leaseback arrangement?

A)
Toll-bridge bonds
 B)
Housing authority bonds
 C)
Variable-rate demand obligations
 D)
Lease-rental bonds
A

Lease rental bonds

Lease rental bonds backed by lease back agreement

“Certain revenue bonds—called lease-rental bonds—are secured by a leaseback arrangement. For example, the state may set up an agency to construct a new office complex to house all state agencies. This authority issued the bonds. Once the facility is built, the state leases the complex from that authority. The bonds are backed by the lease payments.”

27
Q

In a firm commitment underwriting of a divided muni syndicate, what happens if a member does not sell all his portion of the bonds?

A

The member receives the bonds for it’s inventory

“Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory.”

28
Q

In an undivided (eastern) syndicate, liability for unsold securities rests with

A)
the syndicate members that failed to sell their allotment.
B)
the syndicate manager.
C)
the issuer.
D)
the syndicate members on a pro rata basis.
A

D) The syndicate members of a pro rata basis

> Western culture ‘every man for his own’ Eastern culture more collective. So Eastern account, liability with all members (pro rata)

“In an undivided (Eastern) account, liability for unsold securities rests with each syndicate member based on its participation percentage. For example, if a syndicate member has a 10% participation, that member would be responsible for 10% of any unsold securities (even if that member sold all of its participation). Sales do not affect undivided accounts.”

29
Q

T/F: If a callable bond is bought at a discount, the YTC is lower than the YTM

A

False, the YTM is lower than the YTC

> so YTM would sho won trade confirm

“For a bond bought at a discount, the YTM is lower than YTC.”

30
Q

T/F: For a callable bond bought at a discount, the YTM is lower than YTC.

A

True

> YTM would show up on a trade confirm

“For a bond bought at a discount, the YTM is lower than YTC.”

31
Q

Are The concession and

The takedown part of the agreement among underwriters doc?

A

Yes

They are both part of the doc

32
Q

T/F: Both muni and gov securities are exempt from the registration and disclosure provisions of the Securities Act of 1933

A

True, both exempt
>munis exempt registration/disclosure
>gov securities exempt registration/disclosure

33
Q

T/F: Because municipal bonds are exempt from federal regulations, trust indentures go a long way in protecting bondholders, and are hence sometimes referred to as “protective covenants.”

A

True

Referred to as protective covenants

34
Q

For muni revenue bond what doc would show the priority of payments under the indenture—what obligation is paid first and second?

A

The Flow of Funds

Flow of funds would show priority of payments in muni revenue bond

35
Q

[munis] Gross revenue pledge

A

Debt service is paid first from the gross revenues, operations and maintenance expenses are paid second.

“Hint: These pledges refer to when debt service is paid. If first: from the gross revenues. If second: from the net revenues.”

36
Q

T/F: The Municipal debt statement is a major tool for analyzing GO bonds

A

True

Used to analyze GO bonds

37
Q

For munis, the debt coverage ratio shows what?

A

How many times do the current/expected revenues cover the bond’s debt service requirements?

Net Operating Income / Total debt service

NOI= revenue - certain operating expenses

​

38
Q

Net operating income is a company’s revenue minus certain ___ expenses (COE), not including taxes and interest payments. It is often considered the equivalent of EBIT.

A

Operating expenses

“Net operating income is a company’s revenue minus certain operating expenses (COE), not including taxes and interest payments. It is often considered the equivalent of earnings before interest and tax (EBIT).”

39
Q

A trade is made for $10,000 of municipal bonds on an ex-legal basis. That means _____

A

Legal opinion is not attached

“Regular way delivery for municipal bonds is with the legal opinion attached. However, under MSRB Rule G-12, if, at the time of the trade, it is specified that the delivery will be made ex-legal, it is a good delivery. In this case, the bond will typically be stamped ex-legal.”

40
Q

In the context of municipal bond underwritings, the true interest cost (TIC) is different from the net interest cost (NIC) because ______

A

It reflects time value of money

> TIC reflect time value
NIC does not

“The TIC method uses present value calculations that consider the time value of money (as opposed to NIC, which does not consider the timing of interest payments).”

41
Q

T/F: The TIC method uses present value calculations that consider the time value of money (as opposed to NIC, which does not consider the timing of interest payments).

A

True

TIC (true interest cost) reflects time value

Net interest cost does not

42
Q

When a selling group member is part of a muni GO underwriting, what is their compensation?

A

The selling concession

When a selling group member is part of the underwriting, their compensation is the selling concession.

43
Q

T/F: In a muni GO underwriting, the syndicate members earn the selling concession

A

False, the syndicate members earn the takedown

> selling group members earn the selling concession

When a selling group member is part of the underwriting, their compensation is the selling concession. The syndicate manager earns the management fee. The syndicate members earn the takedown.

44
Q

T/F: When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

A

True

If premium, coupon greater than YTM

Series 7 (64 decks)

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