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Flashcards in A - Municipal Securities Deck (120):
1

Four bonds have the same coupon. Which of the bonds will increase in price the most if yields drop by 40 basis points?

A. A five-year bond B. A seven-year bond C. A 10-year bond D. A 20-year bond

Incorrect! The correct answer is: D. A 20-year bond

A 20-year bond. The longest-term bond will always change the most in price when interest rates and yields (basis) change. If yields (basis) are going down, the prices will rise, and vice versa. Always pick the longest bond. [Module 5, Municipal Securities, Section 8.4]

2

When computing debt service coverage for revenue bonds in a net revenues pledge, the ratio used is:

A. Net revenues to debt service B. Gross revenues to operating expenses C. Gross revenues to debt service D. Net revenues to operating expenses

Correct Answer: A. Net revenues to debt service

Net revenues to debt service. Net revenues (total revenues less maintenance expenses) divided by debt service (the amount of interest and principal due that year). Remember, you must subtract all expenses prior to finding debt service in a net revenues pledge. If the question had been a gross revenues pledge debt service, the answer would have been "gross revenues to debt service" because the debt service is paid with the first money in -- the gross revenues. [Module 5, Municipal Securities, Section 9.4]

3

Relating to the price of a bond, one basis point is:

A. 1% B. .01% C. .001% D. .0001%

Incorrect! The correct answer is: B. .01%

01%. A basis point is .0001, which is .01%. For the exam, the dollar equivalent is $0.10 on a $1,000 bond. In actuality, this is not necessarily true since basis is yield to maturity basis, which takes into consideration length of maturity and price of the bond. But the test makers have decided to look at a basis point as .0001, and then loosely translate it to .01% of $1,000 or $0.10 per $1,000. In practice, this is not true -- but accept it for the test! [Module 5, Municipal Securities, Section 7.2]

4

All of the following purchase municipal bonds in the secondary market for investment purposes, except:

A. Individuals B. Broker/dealers C. Broker's brokers D. Issuers

Correct Answer: C. Broker's brokers

Broker's brokers. Broker's brokers do not purchase municipal bonds in the secondary or primary markets for their own investment purposes. A broker's broker locates bonds for institutions and broker/dealers. It is possible for issuers to purchase their own bonds as a means of retiring the bonds, which is considered an issuer's self-investment. Individuals and broker/dealers both buy municipal bonds. [Module 5, Municipal Securities, Section 7.1]

5

Serial bond quotes are based on a:

A. Basis B. Nominal yield C. Current yield D. Dollar price

Incorrect! The correct answer is: A. Basis

Basis. Serial bonds are quoted on a basis. Basis is "yield to maturity basis," which is similar to current yield with an adjustment for the premium or discount on the bond. Serial bonds mature in different years, which is why they are sold on a yield to maturity basis. The test will refer to basis and serial bonds, so you should know serial bonds are quoted in basis points. [Module 5, Municipal Securities, Section 3.2]

6

Which of the following is considered call protection for the holder of a municipal bond?

A. When the issuer has to tell the holder they will be calling the bond B. When the issuer cannot call the bond for 10 years, even with the bond maturing in 14 years C. When the holder can refuse to redeem the bond if the issuer issues a call on the bond D. When the issuer has to give the holder a new bond if they call in the bond being held

Correct Answer: B. When the issuer cannot call the bond for 10 years, even with the bond maturing in 14 years

When the issuer cannot call the bond for 10 years, even with the bond maturing in 14 years. A period before the time the issuer can call the bond is a call protection, just as the requirement to call the bond in at a price above par is also a call protection. The other statements are ridiculous. [Module 5, Municipal Securities, Section 8.7]

7

Which two of the following are not "good delivery" for a municipal bond?

I. The sale of a bearer bond and the delivery of a registered bond
II. A bond sold "ex-legal" and delivered without the legal opinion
III. The sale of a bond requiring a legal opinion delivered without the legal opinion
IV. A bond delivered with a legal opinion

A. I and IV B. I and II C. I and III D. II and III

Incorrect! The correct answer is: C. I and III

I and III. Be careful. The question asks which are not good delivery of a municipal bond. To be good delivery when completing a trade, the actual bonds (or stock) must be exactly as stated in the verbal trade agreement. If bonds were said to be bearer bonds, and then the buyer received registered bonds, the seller did not tell the truth and has "failed to deliver" what was promised. All municipal bonds require a legal opinion, and if a bond is delivered without a legal opinion, then the seller has failed to deliver as promised. Concerning the bond sold ex-legal and delivered without the legal opinion, the seller said there was no legal opinion, and that is how the bond was delivered. This makes it acceptable and excludes it from being a correct answer. [Module 5, Municipal Securities, Section 11.1]

8

Interest on municipal bonds is:

A. Subject to federal income tax B. Subject to federal income tax except for the first $100 of dividends C. Subject to federal income tax except for the first $100 of interest D. Exempt from federal income tax

Correct Answer: D. Exempt from federal income tax

Exempt from federal income tax. All municipal bond interest is exempt from federal taxes, but not from state taxes for the test. There is an exception. Most, but not all, states also allow their own municipal issues to be exempt from their state income taxes. If the question asks generally, municipal bonds are exempt only from federal taxes. If the question tells you where the investor lives and it is in the same the state as the issue, that issue is exempt from both federal and state income taxes. [Module 5, Municipal Securities, Section 10.1]

9

Which two of the following statements are true regarding an already outstanding municipal bond selling at a discount?

I. The interest is exempt from federal taxes.
II. Capital gains are exempt from both federal and state taxes.
III. The yield to maturity will be lower than the yield on the face (nominal yield) of the bond.
IV. The yield to an investor will be greater than if the investor had bought the bond at its par value.

A. I and II B. I and IV C. II and III D. III and IV

Incorrect! The correct answer is: B. I and IV

I and IV. Interest is exempt from federal but not state taxes other than in the state of issue. The yield to maturity will always be greater, not lower, when a bond sells at discount because it appreciates and goes along with the current yield, which will also always be greater. Capital gains are always subject to taxes unless bought at an original issue discount. [Module 5, Municipal Securities, Sections 8.5 & 10.1]

10

Which of the following municipal bonds requires a feasibility study to determine the ability to pay interest when due?

A. Special tax bond B. Revenue bond C. General obligation bond D. None of the above

Incorrect! The correct answer is: B. Revenue bond

Revenue bond. This is the correct answer because the interest and principal are derived solely from the project's revenue, and the feasibility study would tell if there will be enough revenue to pay for the bond. Both special tax bonds and revenue bonds are backed by the full taxing power of the municipality. [Module 5, Municipal Securities, Section 9.2]

11

The offering scale of a new municipal bond shows the:

A. Offering prices B. Current yield C. Nominal yield D. Yield to maturity

Incorrect! The correct answer is: D. Yield to maturity

Yield to maturity. The offering scale always shows the yield to maturity. Current yields are determined by current price. The nominal yield determines the yield to maturity and offering prices of municipal serial bonds are always in yield to maturity. [Module 5, Municipal Securities, Section 6.1]

12

Municipal Securities Rulemaking Board (MSRB) rules are enforced by all of the following organizations, except:

A. MSRB B. FINRA C. SEC D. Comptroller of the Currency

Incorrect! The correct answer is: A. MSRB

MSRB. The Municipal Securities Rulemaking Board (the MSRB) has nothing to do with enforcing the rules for municipal bonds. The MSRB is a regulating body. The MSRB makes the rules, but it does not enforce the rules. Only FINRA enforces the rules. Since banks deal in money, the Controller of the Currency is very involved, and the Securities and Exchange Commission oversees all markets, though municipal securities are exempt from registration. The FDIC and the Federal Reserve Board also enforce MSRB rules. [Module 5, Municipal Securities, Section 11.0]

13

Which of the following lists of Moody's rated bonds is ranked in descending order of investment merit?

A. Aa, Al, A, Baa B. Baa, Ba, Aa, -A1 C. Baa, -Aaa, -Ba, -A1 D. Baa, -Ba, -A1, Aa

Correct Answer: A. Aa, Al, A, Baa

Aa, Al, A, Baa. This is the descending order of "merit" or "risk." All B-rated bonds are riskier than A-rated bonds, and the descending order of the As is Aaa, Aa, Al, A. [Module 5, Municipal Securities, Section 5.6]

14

A municipal bond that pays interest and principal from revenues received by a corporation that has constructed facilities to improve the environment would best be described as:

A. An income bond B. An industrial revenue bond C. A public facility bond D. A general obligation bond

Incorrect! The correct answer is: B. An industrial revenue bond

An industrial revenue bond. This type of bond is an industrial revenue bond. Interest and principal are paid from rent (therefore revenue), and an industrial corporation that has constructed facilities for improving the environment makes the payments, such as a oil refinery constructing air pollution control equipment. A public facility bond is just a revenue bond (not industrial); income bonds only pay interest if there is income from sales and are issued by corporations only (not a municipal bond); general obligation bonds are backed by taxes. [Module 5, Municipal Securities, Section 2.3]

15

To what security does the MIG rating apply?

A. Project notes B. U.S. Treasury securities C. Bond anticipation notes D. Industrial development bonds

Correct Answer: C. Bond anticipation notes

Bond anticipation notes. MIG applies to municipal notes. Of the debt securities that were given, there are two municipal notes -- bond anticipation notes and project notes. Since the U.S. government guarantees project notes, they do not need to be rated. That leaves the bond anticipation notes. [Module 5, Municipal Securities, Section 2.1]

16

A level debt service bond issue is one in which:

A. Combined annual interest and principal payments are equal. B. Annual interest payments are equal. C. Annual principal payments are equal. D. All of the above are true.

Correct Answer: A. Combined annual interest and principal payments are equal.

Combined annual interest and principal payments are equal. When both the principal and interest payments are the same every year, it is considered a level debt service. The two choices "annual interest payments are equal" and "annual principal payments are equal" are not complete because debt service includes both principal and interest. [Module 5, Municipal Securities, Section 9.3]

17

A legal opinion on a municipal bond is prepared by:

A. The underwriter B. The trustee C. The municipality D. An independent law firm

Incorrect! The correct answer is: D. An independent law firm

An independent law firm. A law firm always writes the legal opinion. The firm is employed by the issuer, but must make an impartial analysis of the bond (by law). The opinion only states that the bond can be legally sold as a municipal security and that the issue is exempt from federal taxes. The law firm will also provide an opinion regarding the exemption of that state's taxes. [Module 5, Municipal Securities, Section 5.5]

18

All but which of the following are possible reasons that a dealer might fail to deliver municipal securities to another dealer who has purchased them?

A. Lack of proper endorsement on a registered bond B. Mutilated coupons C. Lack of a legal opinion D. A significant change in the bond's market price

Incorrect! The correct answer is: D. A significant change in the bond's market price

Correct answer (false statement): A significant change in the bond's market price. A significant change in market price is no reason to fail to deliver. A contract to trade must be upheld no matter what happens to the price. If this were not true, either the prices would never change or there would always be someone who would not uphold their end of the contract. [Module 5, Municipal Securities, Section 11.1]

19

Interest on municipal bonds is computed on:

A. A 30-day month and a 360-day year B. A 30-day month and a 365-day year C. Actual days elapsed and a 360-day year D. Actual days elapsed and a 365-day year

Incorrect! The correct answer is: A. A 30-day month and a 360-day year

A 30-day month and 360-day year. Municipal bonds are computed on a 30-day month and 360-day year. U.S. government bonds, notes, and bills compute interest on actual days elapsed and a 365-day-year basis. In municipal bonds, all months are considered as 30 days. [Module 5, Municipal Securities, Section 8.6]

20

All of the following are found in a municipal revenue bond indenture, except:

A. Restrictions on the sale of additional bonds B. Rate covenant C. Sinking fund provisions D. Yields to maturity

Incorrect! The correct answer is: D. Yields to maturity

Correct answer (false statement): Yields to maturity. The yields to maturity are only determined by the current market price. Therefore, they are not found in a trust indenture, which outlines the rights and duties of the issuer and the bondholder. [Module 5, Municipal Securities, Sections 5.1 & 8.3]

21

The pricing of revenue bonds is influenced by all of the following, except:

A. The potential earnings of the facility B. The number of times interest charges are covered by revenues C. The provision for a sinking fund and other agreements as stated in the indenture of the official statement D. The amount of general obligation bonds that are outstanding with the municipality

Incorrect! The correct answer is: D. The amount of general obligation bonds that are outstanding with the municipality

Correct answer (false statement): The amount of general obligation bonds that are outstanding with the municipality. This is a revenue bond, so the amount of outstanding debt to the municipality has little effect on a revenue bond that will be paid by the revenues received on the usage of the facility. The market price of the bond is all based on "the potential earnings of the facility," the number of times the interest is covered (debt service coverage), and the fact that there is a "provision for a sinking fund" (which always improves the pricing of a revenue bond). [Module 5, Municipal Securities, Sections 5.2 - 5.4]

22

Rating agencies look at the net debt and the net direct debt of a municipality to determine the ratings of the municipality's general obligation bond issues. Which of the following is used by rating agencies to determine net direct debt?

A. All outstanding debt + any new debt being issued divided by the municipal population B. All outstanding debt + any new debt being issued + any overlapping debt incumbent on the municipality divided by the municipal population C. All outstanding debt + any new debt being issued divided by the state population D. All outstanding debt + any new debt being issued + any overlapping debt incumbent on the municipality divided by the state population

Incorrect! The correct answer is: A. All outstanding debt + any new debt being issued divided by the municipal population

All outstanding debt + any new debt being issued divided by the municipal population. This is net direct debt. Therefore, you do not include overlapping debt. Of course, the rating agencies never divide by the state population; the agencies are only concerned with the ratings in a particular municipality. If this had been net debt, then overlapping debt would be included. [Module 5, Municipal Securities, Section 9.1]

23

The "dated" date of a new municipal bond is:

A. The date from which interest accrues B. The date when the bond can be called C. The date when the bond is sold D. The date when the bond matures

Incorrect! The correct answer is: A. The date from which interest accrues

The date from which interest accrues. This is the date from which interest starts to accrue for the bondholder. The bond is bought or sold on the trade date. The call date is when the issuer may call back and pay off the bond, and the date it matures is listed on the bond. [Module 5, Municipal Securities, Section 6.1]

24

A 12-year serial bond is selling at a premium. It is callable in seven years at par. How is the bond quoted?

A. Yield to maturity B. Nominal yield C. Current yield D. Yield to call

Incorrect! The correct answer is: D. Yield to call

Yield to call. Any municipal bond that is selling at a premium and callable at par has to be quoted on the yield to call. This is because the rules require that municipal bonds be quoted on the lesser of the yield to maturity or the yield to call. The only time a bond will be quoted on a yield to call is if the call price is lower than the purchase price. For the test, remember that discount bonds are never quoted on yield to call. Premium bonds callable at a premium could be, and are usually quoted on the yield to call, because the highest call price is 105 ($1050). Very few bonds sell between $1000 and $1050. If prices are not given, always assume that the call price for a premium bond is lower than the purchase price. All premium bonds callable at par are quoted on the yield to call. [Module 5, Municipal Securities, Section 7.2]

25

An 8.2% County of San Francisco water revenue bond pays interest February 1 and August 1. An investor who buys the bonds on Friday, May 15 will pay the seller for how many days of accrued interest?

A. 104 B. 107 C. 109 D. 110

Correct Answer: C. 109

109. Do the following calculation to determine the number of days. Remember that settlement is three business days, but with the trade on Friday, you must add two more weekend days for a total of five days to settlement.


5/15 trade date
+ 5 3 regular way plus 2, for the weekend
5/20 settlement date
- 2/1 last interest date
3/19 or 3 months x 30 days plus 19 more days = 109 days

[Module 5, Municipal Securities, Section 8.6]

26

Municipal bonds can be issued in all of the following ways, except:

A. Registered B. Book entry C. Series, serial, and term D. Series but not serial or term

Correct Answer: D. Series but not serial or term

Correct answer (false statement): Series but not serial or term. Municipal bonds can only be in registered or book-entry form. The bonds can no longer be in bearer form. Registered means the bond is in certificate form with the name of the bond owner on the certificate. A book-entry bond means the person owns the bond but never receives the certificate -- the trustee or transfer agent has the names of the bond owners. A bond could be a series bond or not, but it will be a term bond, a serial bond, or a combination serial and term bond. Some bonds are both serial and term, in as much as they have 20 years of serial maturities, and then one or two large term maturities at the end. A municipality only has series bonds if it has issued more than one bond. When the whole issue comes due on one date, the bonds are called term bonds. When the bond has many maturity dates, the bond is called a serial bond, or a bond with "serial maturities." [Module 5, Municipal Securities, Sections 3.1 - 3.3]

27

Which of the following would a municipality establish to hold funds to pay the expenses of a project for which a bond has been issued?

A. Debt service fund B. Sinking fund C. Renewal and replacement fund D. Maintenance fund

Incorrect! The correct answer is: D. Maintenance fund

Maintenance fund. To hold the cash for expenses, a municipality will set up a maintenance fund for the facility. The sinking fund is used for the debt service if the bond is a term bond. The debt service fund is for paying principal and interest. The renewal and replacement fund is to ensure the project will keep working for a number of years. [Module 5, Municipal Securities, Section 5.3]

28

All of the following are true regarding the issuance of revenue bonds as compared to general obligation bonds, except:

A. The issuance of revenue bonds does not require a citizen referendum vote. B. Revenue bonds can be issued after local debt limitations have been reached. C. Revenue bonds have lower coupon rates than general obligation bonds. D. Revenue bond interest payments do not decrease municipal revenues.

Incorrect! The correct answer is: C. Revenue bonds have lower coupon rates than general obligation bonds.

Correct answer (false statement): Revenue bonds have lower coupon rates than general obligation bonds. Revenue bonds have higher coupon rates because they are riskier and have a greater chance to default. All the other statements are true because they are completely supported by revenues of the facility they financed, and the general population has no obligation or say regarding them. [Module 5, Municipal Securities, Section 2.3]

29

Which of the following new municipal issues must be purchased through competitive bidding?

A. Construction loan notes B. Revenue bonds C. General obligation bonds D. Tax anticipation notes

Incorrect! The correct answer is: C. General obligation bonds

General obligation bonds. General obligation bonds almost always have to be purchased (by an underwriter) through competitive bidding. The two notes -- the CLN (construction loan note) and the TAN (tax anticipation note) -- are short-term financing until other financing is secured. Revenue bonds are paid off by revenues from the use of the facility for which the bond was issued. Since general obligation bonds are an obligation of the public's money, they must be purchased through competitive bids to get the lowest interest cost. [Module 5, Municipal Securities, Section 6.2]

30

A municipal dealer purchasing municipal bonds from another dealer will assume all of the following, except:

A. The bonds will be delivered in three business days. B. The bonds will have a legal opinion attached. C. The bonds will be in registered form. D. The bonds will be callable bonds.

Correct Answer: D. The bonds will be callable bonds.

Correct answer (false statement): The bonds will be callable bonds. The dealer can assume all the given statements except the fact that they are callable. Whether a bond is callable can only be known if it is stated. A confirmation from broker to broker as well as a confirmation to the customer must state if the bond is callable, but does not need to mention if the bond is not callable. The fact that the bond is in registered form does not need to be stated, but it must be stated if the bond is in book-entry form. [Module 5, Municipal Securities, Section 11.1]

31

A municipal bond has an early debt retirement provision. How is this provision funded?

A. A sinking fund B. The refunding of the bond C. Payments to a serial maturity D. A debt call fund

Incorrect! The correct answer is: A. A sinking fund

A sinking fund is the method that municipalities use to portion off part of their revenues and taxes to meet the early debt requirement of a bond. [Module 5, Municipal Securities, Section 8.7]

32

A dealer purchases a $10,000 municipal bond from another dealer. The purchasing dealer can assume all of the following, except:

A. $10,000 worth of bonds will be delivered. B. The bonds will be in registered form. C. Delivery will be in three business days. D. The bonds will be callable.

Incorrect! The correct answer is: D. The bonds will be callable.

Correct answer (false statement): The bonds will be callable. Callable bonds cannot be assumed, unless it is stated in the sale. Whether a bond is callable or not is not a condition of sale, so it is never assumed. If the bond is callable, then that statement must be made. If the bonds are not callable, nothing needs be stated. [Module 5, Municipal Securities, Section 11.1]

33

A municipality refunds a revenue bond issue for all of the following reasons, except:

A. To reduce interest charges to the facility B. To issue new bonds at lower interest rates C. To reduce the market value of outstanding bonds that are not refunded D. To lengthen the payoff period at reduced interest

Correct Answer: C. To reduce the market value of outstanding bonds that are not refunded

Correct answer (false statement): To reduce the market value of outstanding bonds that are not refunded. If a municipality refunds a bond issue, that whole issue will be called. There would be no outstanding bonds after the refunding, so the market value has no bearing. When a municipality refunds a bond, it does not give it back. To refund means to issue another bond and then call in the existing bond, usually to reduce interest rates. The municipality does not care about the market price of the issue. The municipality does care about decreasing the interest charges. This is one of the primary reasons for refunding or paying off bonds early. [Module 5, Municipal Securities, Section 8.7]

34

MSRB rules state that subject or nominal quotes can be given for:

A. Revenue bonds only B. Informational purposes only C. General obligation bonds only D. Municipal bonds subject to the alternative minimum tax only

Incorrect! The correct answer is: B. Informational purposes only

Informational purposes only. Subject quotes are for informational purposes to help an investor decide whether to buy. A subject quote is for any type of bond that is trading in the OTC market. If a broker/dealer is showing the bonds, either a subject or a firm quote can be given. Bonds subject to the alternative minimum tax (AMT) are generally revenue bonds issued for a corporation, and thus the interest could possibly be taxable for certain investors. [Module 5, Municipal Securities, Section 7.2]

35

Use the tombstone shown below to answer the following question:


$10,000,000
City of Richmond
Pollution Control Bonds
Maturity Rate Yield
2002 5% 4.80
2003 5% 4.90
2004 5 1/8% 4.95
2005 5 1/4% 100
2006 5 1/4% 5.30
2007 5 1/2% 5.55

The bonds maturing in 2006 are being offered at:


A. A premium B. Par value C. A discount D. None of the above

Incorrect! The correct answer is: C. A discount

A discount. The bonds are offered at a discount. This can be seen by the yield at 5.30 while the coupon, or nominal yield, is at 5 1/4%. Since the yield is higher than the coupon, the price has to be lower than par (100, or $1,000). Therefore, any time the price is less than $1,000, or par, the bonds are at a discount and the yield is higher. If the price is above par, or at a premium, the yield is lower than the coupon. [Module 5, Municipal Securities, Section 8.5]

36

Which two of the following statements best describe serial bonds?

I. Serial bond nominal yields always equals basis.
II. The current yield on a serial bond moves in the same direction as basis.
III. A serial bond has different issuing dates.
IV. A serial bond has different maturity dates.

A. I and IV B. II and IV C. II and III D. III and IV

Incorrect! The correct answer is: B. II and IV

II and IV. Serial bonds are all issued at one time with different maturing dates. Because of the differing dates, these bonds are quoted on a yield to maturity basis, or basis. Since basis and current yield are both based on the coupon and the price, they both move up or down from par in the same direction. A series bond has different issuing dates, and the only time that basis is equal to the nominal yield is when the bond is selling at par. In those instances, the serial bond will be quoted at 100 rather than in basis -- so saying that serial bond nominal yields always equal basis is not always correct. [Module 5, Municipal Securities, Sections 3.1 & 3.2]

37

Municipal bond trades have a settlement date of:

A. The same day B. The next business day C. Three business days D. Five business days

Correct Answer: C. Three business days

Three business days. Municipal bonds settle just like regular stock and corporate bonds -- in three business days. Government issues settle the next day. [Module 5, Municipal Securities, Section 11.1]

38

Under MSRB rules, all of the following are true regarding customer confirmations, except:

A. The confirmation must show commissions in an agency transaction. B. The confirmation on a callable bond must show that the bond is callable and the call date. C. The confirmation must show the yield to call on a premium bond callable at par. D. The confirmation must show whether the bond is a registered bond or a book- entry bond.

Incorrect! The correct answer is: D. The confirmation must show whether the bond is a registered bond or a book- entry bond.

Correct answer (false statement): The confirmation must show whether the bond is a registered bond or a book-entry bond. The confirmation only needs to show if the bond is in book- entry form. If the bond is registered, it does not need to be shown. If the bond is callable, it must be stated and the call date must be given; however, if the bond is not callable, then nothing is stated. In addition, if the bond is purchased at a premium and it is callable, then the yield to call must be given. The confirmation must show how the broker/dealer acted -- as either an agent or a principal, and the commission if acting as an agent/broker. This is required. [Module 5, Municipal Securities, Section 11.1]

39

A $25,000 par value bond with a 7.2% coupon is priced to yield 6.9%. Which of the following is true regarding the bond?

A. The bond is selling at a premium. B. The bond is selling at a discount. C. The bond is selling at par. D. The bond is selling above parity.

Incorrect! The correct answer is: A. The bond is selling at a premium.

The bond is selling at a premium. Remember, the yield is down so the price is up. The price is up above par, or above $1,000. It works like a teeter-totter -- as one end goes up, the other goes down. Since the yield is down, the price must be up, meaning the bond is selling at a premium. [Module 5, Municipal Securities, Section 8.5]

40

An investor would like to buy a municipal revenue bond. As her registered representative, you show her a particular bond that was issued by New York City. Which of the following is the most important factor to consider for your investor's purchase of the tax-free bonds?

A. Good title to the property B. Debt service coverage C. Legislative changes D. Amount of outstanding debt issued by the city

Correct Answer: B. Debt service coverage

Debt service coverage. One may be tempted to choose legislative changes because changes in the tax laws may affect the tax-free status of the bonds. However, this is a revenue bond, and debt service coverage and competitive projects are factors in revenue bonds. General obligation bonds tax the general population to recoup the amount borrowed and to pay for the interest paid to investors. Essentially, this question asks whether you understand the difference between a revenue bond and a GO bond. [Module 5, Municipal Securities, Section 9.1]

41

If a bond is selling at a 7.3 basis and the coupon rate is 8.25%, the bond is selling:

A. Above par B. At par C. Below par D. Cannot determine from the information provided

Correct Answer: A. Above par

Above par. A bond that is yielding less than the face amount has to be selling above par. This is because the loss of the value of the bond will compensate for the higher interest rate of the bond in relation to the price. [Module 5, Municipal Securities, Section 8.5]

42

If a municipal issuer publishes an official notice of sale, it indicates the offering will be made:

A. Through a private placement B. On a competitive basis C. On a negotiated basis D. None of the above

Incorrect! The correct answer is: B. On a competitive basis

On a competitive basis. When a notice of sale is published, it is an indication that the bond is being sold on a competitive basis. A private placement and a negotiated basis are the same thing -- between the issuer and underwriter(s). [Module 5, Municipal Securities, Section 6.1]

43

A municipal security that is used to start construction of low-cost housing is known as a:

A. Revenue bond B. BAN C. General obligation bond D. CLN

Incorrect! The correct answer is: D. CLN

CLN. Construction loan note. The security is backed by the U.S. government and may even be called a project note. Municipalities, not the U.S. government, issue revenue and general obligation bonds. A BAN (bond anticipation note) is a short-term note to finance some type of construction or other funding until a bond is issued. CLNs are issued by a municipality for a construction loan to get a housing project started and completed and then will be paid off by a government-issued public housing bond. Since a government bond pays the project note off, the government backs the project note. [Module 5, Municipal Securities, Section 2.1]

44

Four municipal bonds have the same maturity date. Which of the following would cost an investor the greatest dollar amount when the bonds are purchased at the following offering prices?

A. A 4 3/4% coupon bond offered on a 5.10 basis B. A 5 1/4% coupon bond offered on a 5.00 basis C. A 5 3/4% coupon bond offered on a 6.00 basis D. A 6 1/4% coupon bond offered on a 6.50 basis

Incorrect! The correct answer is: B. A 5 1/4% coupon bond offered on a 5.00 basis

A 5 1/4% coupon bond offered on a 5.00 basis. The bond selling for the highest price is the bond with the lowest yield in comparison to its coupon rate. This is because the bond loses money at maturity, meaning that the issuer pays only the par amount while the buyer paid a premium amount on the bond. This brings the yield down. Think of the teeter-totter, and you will see that a 4 3/4% coupon bond offered on a 5.10 basis, a 5 3/4% coupon bond offered on a 6.00 basis, and a 6 1/4% coupon bond offered on a 6.50 basis are selling at a discount, while the 5 1/4% coupon bond offered on a 6.00 basis is selling at a premium. The only bond selling at a premium must be the highest priced bond. [Module 5, Municipal Securities, Section 8.5]

45

The MSRB does all of the following, except:

A. Regulates municipal securities dealers B. Regulates municipal securities salesmen C. Regulates municipal securities advertising D. Sets fixed commissions for municipal dealer's agency transactions

Incorrect! The correct answer is: D. Sets fixed commissions for municipal dealer's agency transactions

Correct answer (false statement): Sets fixed commissions for municipal dealer's agency transactions. The MSRB does all of the regulating, but it does not set the commissions for agency transactions. These are determined by the rules as set by FINRA under the 5% Policy. [Module 5, Municipal Securities, Section 11.0]

46

The self-regulatory organization established to regulate the municipal bond industry is the:

A. MSRB B. FINRA C. NYSE D. SEC

Correct Answer: A. MSRB

MSRB. The Municipal Securities Rulemaking Board (MSRB) is the self-regulatory body for bonds. The MSRB is a rule-making board, but not an enforcement body. FINRA oversees the OTC market; the NYSE oversees the New York Stock Exchange, and the Securities and Exchange Commission (SEC) oversees all aspects of corporations and securities matters. The SEC and FINRA are the enforcers for the municipal industry along with the Controller of the Currency and the Federal Reserve Board. [Module 5, Municipal Securities, Sections 6.0 & 11.0]

47

A customer of yours notices that some new municipal serial bonds are being issued with an inverted yield curve. The customer asks you about this. You tell the customer that the inverted yield curve indicates:

A. More bonds are being issued at a discount. B. More bonds are being issued at a premium. C. Investors in the marketplace are expecting interest rates to rise. D. Investors in the marketplace are expecting interest rates to fall.

Incorrect! The correct answer is: D. Investors in the marketplace are expecting interest rates to fall.

Investors in the marketplace are expecting interest rates to fall. Whether bonds are selling at a discount or premium is a result of interest rates fluctuations. If the bonds being sold are in an inverted yield curve, with higher yields in the early years and lower yields in the later years, then interest rates must be high now and are expected to drop. [Module 5, Municipal Securities, Section 8.4]

48

The Jacksonville, Florida Water District has issued an $18 million 7% water revenue term bond. The bond is issued with a gross revenue pledge. Which of the following is paid first out of the revenues received by the water district?

A. Renewal and replacement costs B. Maintenance costs C. Sinking fund requirement D. Debt service

Correct Answer: D. Debt service

Debt service. A gross revenues pledge always requires the debt service to be paid prior to the maintenance costs. If this had been a net revenues pledge, the answer would be maintenance costs. The other two follow the maintenance costs. Debt service and maintenance costs are always the first two items paid with the revenues from the usage of the facility for which the bond was issued. [Module 5, Municipal Securities, Section 5.3]

49

The Atlanta School District is issuing a 6 1/2% school building bond at 98% of its par value, which will mature in 10 years. An investor who purchases the bond at its offering price and holds the bond for the 10 years will receive a yield to maturity of:

A. 6 1/2% B. More than 6 1/2% C. Less than 6 1/2% D. None of the above

Incorrect! The correct answer is: B. More than 6 1/2%

More than 6 1/2%. Since the bond is selling below par, 98% or $980, the yield to maturity will be more than the face value. The investor only pays $9,800 for a $10,000 bond and at maturity receives the full $10,000. Since the investor gains $200, her effective yield is more than the 6 1/2% coupon on the bond. If the bond were selling at a premium, such as at 102, the effective yield would be less than the 6 1/2% coupon. The price of the bond determines the effective yield for the investor. [Module 5, Municipal Securities, Section 7.2]

50

Which two of the following are not violations of MSRB rules?

I. A gift to a customer of $500
II. A yearly magazine subscription given to a customer worth $150
III. A gift of basketball tickets to a customer worth $75
IV. A business lunch with a customer that cost $125

A. I and II B. II and III C. I and III D. III and IV

Incorrect! The correct answer is: D. III and IV

III and IV. A gift of basketball tickets to a customer worth $75 and a business lunch with a customer that cost $125 are not violations. The maximum nonbusiness amount that can be given is $100. There is no limit on business costs. [Module 5, Municipal Securities, Section 11.2]

51

What type of municipal bond is paid by gasoline and cigarette taxes?

A. Special tax bond B. BAN C. General obligation bond D. Refunding bond

Incorrect! The correct answer is: A. Special tax bond

Special tax bond. The refunding bond is backed by whatever backed the previous bond. A general obligation bond is backed by property taxes, and a BAN is a short-term security for starting projects in anticipation of a bond being issued. That leaves the special tax bond. The answer could also be a revenue bond, which is the same as a special tax bond. [Module 5, Municipal Securities, Section 2.3]

52

Which of the following is equivalent to 50 basis points?

A. 0.5% B. 5% C. 50% D. 500%

Correct Answer: A. 0.5%

0.5%. One basis point is .0001 or .01%, so 50 basis points is 0.50% or 0.5%. [Module 5, Municipal Securities, Section 7.2]

53

The debt of other districts that the residents of a particular municipal district may be responsible for is called:

A. Funded debt B. Overlapping debt C. Floating debt D. Unsecured debt

Incorrect! The correct answer is: B. Overlapping debt

Overlapping debt. Debt of one district shared by a second district is called overlapping debt. Know this. [Module 5, Municipal Securities, Section 9.1]

54

An investor buys 10 City of New York 9 1/2% bonds at 110 with eight years to maturity. After four years, he sells the bond at 107. The bonds pay a yearly interest per $1,000 of:

A. $90 B. $95 C. $104.50 D. $101.65

Incorrect! The correct answer is: B. $95

$95. This is the yearly interest that will be paid. 9 1/2% bonds pay 9 1/2% of $1,000 or .095 x $1,000 = $95. [Module 5, Municipal Securities, Section 8.1]

55

An investor purchases a municipal bond on Wednesday, June 8. The bond interest payment dates are March 1 and September 1. The buyer will have to pay the seller of the bond accrued interest for how many days?

A. 97 B. 100 C. 102 D. 103

Incorrect! The correct answer is: C. 102

102. Remember that regular way settlement is three business days; however, since the trade is on Wednesday, add two more days for the weekend. Use the following calculation:


6/ 8 trade date
+ 5 regular way plus the weekend
6/13 settlement date
- 3/1 last interest day
3/12
3 months x 30 days + 12 = 102 days

[Module 5, Municipal Securities, Section 8.6]

56

Which two of the following are municipal bonds?

I. Income bonds
II. General obligation bonds
III. Revenue bonds
IV. Debenture bonds

A. I and III B. II and IV C. II and III D. III and IV

Incorrect! The correct answer is: C. II and III

II and III. Municipal bonds are only revenue or general obligation bonds. (Know this!) These are the only types of municipal bonds. Debenture bonds and income bonds (pay only from income) are both private industry, corporate bonds. [Module 5, Municipal Securities, Sections 2.2 & 2.3]

57

Another name for municipal general obligation bonds is:

A. Income bonds B. Debenture bonds C. Revenue bonds D. Full faith and credit bonds

Correct Answer: D. Full faith and credit bonds

Full faith and credit bonds. Municipal bonds that are general obligation bonds are called full faith and credit bonds because they are backed by the taxing power of the municipality, and thus, the faith and credit of that municipality. [Module 5, Municipal Securities, Section 2.2]

58

The most detailed financial information about a municipal bond is found in the:

A. Official statement B. Notice of sale C. Trust indenture D. Registration statement

Correct Answer: A. Official statement

Official statement. The most detailed information about a municipal bond is found in the official statement. Municipal bonds are sold with official statements describing the issuer, the issue itself, the taxation in the municipality, and any negative aspects of the municipality. However, every municipal bond is issued under a trust indenture which outlines all of the requirements of the issuer and the privileges of the bondholders. Corporate issues (stocks and bonds) are sold with a prospectus and they must be registered with the SEC. The registration statement is only for a corporate issue. The registration statement is what all underwriters must file with the SEC for corporate securities. [Module 5, Municipal Securities, Section 6.2]

59

Municipal securities that are partially mutilated would still be in good deliverable form if which of the following were no longer legible?

A. The bond numbers B. The CUSIP numbers C. The coupon rate D. The maturity date

Correct Answer: B. The CUSIP numbers

The CUSIP numbers. All the other items listed must be legible except the CUSIP numbers. These do not have to be legible because they are only a means of identification through the broker/dealers. The other items must be legible, or the bonds are not considered in good deliverable form. If any of the other items were not legible, the certificates would have to be sent to the transfer agent to determine the certificate's authenticity. [Module 5, Municipal Securities, Section 11.1]

60

An investor buys 10 City of New York 9 1/2% bonds at 110 with eight years to maturity. She holds the bonds until maturity. The tax consequences at maturity would be:

A. $0 loss B. $300 loss C. $500 loss D. $1,000 loss

Incorrect! The correct answer is: A. $0 loss

$0 loss. Remember that this is a municipal bond and the premium must be amortized over the life of the bond. If the bond is held to maturity, the investor does not get the loss. If the investor sells the bond prior to maturity, the investor must amortize the premium over the years held and reduce the cost basis. If the sale price is higher, she will have a capital gain. If the sale price is lower, she will have a capital loss. Do not worry about the amortizing. It is no longer tested. [Module 5, Municipal Securities, Section 10.1]

61

All of the following are insurers of municipal bonds, except:

A. AMBAC B. FGIC C. FDIC D. MBIA

Correct Answer: C. FDIC

FDIC. FDIC is the insurance for bank accounts at banks. GIC is the Federal Guarantee Insurance Corp., an insurer of municipal bonds. AMBAC, and MBIA are two other insurers of municipal bond payments of principal and interest. [Module 5, Municipal Securities, Section 9.5]

62

On November 10, 2010, the Port of Miami offered $100 million of revenue bonds with maturity dates from 2011 to 2031. The bonds are dated November 1, paying interest on January 1 and July 1, with the first coupon on July 1, 2011. An investor buying the bonds on the offering will receive the first interest payment on:

A. January 1, 2011 B. July 1, 2011 C. January 1, 2012 D. July 1, 2012

Incorrect! The correct answer is: B. July 1, 2011

July 1, 2011. The interest starts to accrue on November 1, 2010. Since it is stated that the first payment will be July 1, 2011, all subsequent payments will be every six months after that. [Module 5, Municipal Securities, Sections 6.1 & 8.1]

63

The City of Chicago is offering $50 million of revenue bonds dated March 1, 2011. The issue has maturity dates from 2012 to 2032. The bonds will pay interest on January 1 and July 1, and will begin paying interest from January 1, 2012. An investor buying the bonds on the offering would receive how many months of interest on the first interest payment?

A. Four months B. Six months C. Nine months D. 10 months

Incorrect! The correct answer is: D. 10 months

10 months. Interest starts to accrue on the dated date and will first be paid on the date determined by the issuer or the underwriters. The first payment date is a function of the day the issue starts to sell and the payment dates. Since there are only four months until the first payment date, the issuer has elected, or the underwriters have made the decision for the issuer, to wait until the second interest date after the dated date. For this reason, these four months plus the usual six months make up the first payment -- 10 months of interest -- and then all payments will be every six months. [Module 5, Municipal Securities, Section 8.1]

64

Which of the following is true of revenue bonds?

A. They are secured by real estate. B. They are backed by the taxing power of the municipality. C. Their credit rating will always be higher than those of general obligation bonds. D. The municipality will agree to keep rates high enough to cover debt service obligations.

Incorrect! The correct answer is: D. The municipality will agree to keep rates high enough to cover debt service obligations.

The municipality will agree to keep rates high enough to cover debt service obligations. This is called a rate covenant. Rate covenants are not backed by real estate or the taxing power of the municipality but rather by the rates of the facility; their credit rating will generally be lower than general obligation bonds. [Module 5, Municipal Securities, Sections 2.2, 2.3, & 5.2]

65

If interest rates were expected to rise over a period of time, a municipality that must raise money would probably issue securities with:

A. Short-term maturities B. Long-term maturities C. Intermediate-term maturities D. None of the above

Incorrect! The correct answer is: B. Long-term maturities

Long-term maturities. The municipality would then have the use of the money even when interest rates were high. The municipality would have a lower interest bond when short-term money was high and yet have money to work with. [Module 5, Municipal Securities, Section 8.5]

66

MSRB rules prohibit municipal dealer gifts to customers that have a value greater than:

A. $25 B. $50 C. $100 D. $250

Correct Answer: C. $100

$100. No gift can be greater than $100 under FINRA and MSRB rules. The $250 gift is the maximum a municipal financial principal can give to politicians as discussed in Module 15. [Module 5, Municipal Securities, Section 11.2]

67

An investor in the 28% tax bracket can buy a 5% municipal bond with a yield to maturity of 6.2%. What yield would the investor need in a corporate bond to receive the same after-tax return?

A. 6.94% B. 8.61% C. 17.85% D. 22.14%

Correct Answer: B. 8.61%

8.61%. Calculate this by subtracting the investor's tax bracket (28%) from 100%, which equals 72%. Divide the yield to maturity, which is 6.2%, by 72%, which equals .08611. Expressed as a percent, it rounds out to 8.61%. Do not use the nominal yield because municipal bonds do not compare nominal yields -- they compare the yield to maturity or yield to call. Municipal bond buyers are more concerned with the eventual yield than how much they get each year. [Module 5, Municipal Securities, Section 10.1]

68

Which of the following is true about one of the municipal put bonds issued by Orange County, California in late 2007 during the put period starting in 2015? This is assuming all information of Orange County is positive and that Orange County has not defaulted on its bonds.

A. The yield will never be higher than the coupon. B. The yield will never be lower than the coupon. C. The yield will always be the same as the coupon. D. It is undeterminable because it is unclear when and who will put the bonds.

Incorrect! The correct answer is: A. The yield will never be higher than the coupon.

The yield will never be higher than the coupon. This is because during the put period, the holder of the bond can put, or sell, the bond back to Orange County. Since the holder can always get par, or 100, for the bond, the holder will never sell it for less than 100. Therefore, if the price cannot be lower than 100, the yield can never be higher than the coupon. [Module 5, Municipal Securities, Section 3.4]

69

The buyer of which of the following would be most interested in the project's engineering report?

A. General obligation bonds B. Project bonds C. Revenue bonds D. Assessment bonds

Incorrect! The correct answer is: C. Revenue bonds

Revenue bonds. Revenue bonds need a report because if the project is not feasible, the question becomes, how the money will be raised to pay off the bond principal and interest. Project bonds is incorrect because they are issued by municipalities for housing projects and are guaranteed by the U.S. government, so a report is not needed. Because general obligation bonds receive revenues from taxes, investors are not interested in reports on projects. Assessment bonds receive payments by the people who use the particular asset of the bond, which were agreed to prior to the issuance of the bond. [Module 5, Municipal Securities, Sections 5.4 & 9.2]

70

A sinking fund provision is most likely required for a:

A. General obligation bond B. Serial bond C. Series bond D. Term bond

Incorrect! The correct answer is: D. Term bond

Term bond. Term bonds, which are frequently revenue bonds, usually have sinking funds. A serial bond does not need a sinking fund because part of it is being repaid every year. General obligation bonds do not need a sinking fund because of the taxing power. However, if the obligations are term bonds, they will have a sinking fund. Government bonds never have a sinking fund. [Module 5, Municipal Securities, Section 3.3]

71

According to the MSRB rules, during the first 90 days of employment, a new registered rep may:

A. Advise a customer B. Advise an investment company C. Discuss investment objectives with a customer D. Discuss bond prices with other municipal dealers

Correct Answer: D. Discuss bond prices with other municipal dealers

Discuss bond prices with other municipal dealers. In the first 90 days, a new registered rep can only discuss bonds with other reps. She may not discuss bonds with customers, nor may she advise them. She is in training! [Module 5, Municipal Securities, Section 11.2]

72

The yearly interest paid divided by the current market price of a municipal bond is called the:

A. Nominal yield B. Yield to maturity C. Current yield D. Yield to call

Incorrect! The correct answer is: C. Current yield

Current yield. The current yield is determined by dividing the current price into the yearly interest. Nominal yield is the yearly interest, while the yield to maturity is the yield over the life of the bond from present to the maturity date. The yield to call is the same as the yield to maturity except it is the yield until the bond could be called, not until maturity. [Module 5, Municipal Securities, Sections 8.1 & 8.2]

73

If a bond has a 5.25 basis and the nominal yield is 4 3/4%, the bond is selling:

A. Above par B. At par C. Below par D. Need more information

Correct Answer: C. Below par

Below par. This bond is selling at a discount (below par) because the actual yield (yield to maturity) is higher than the stated rate that the investor will receive yearly. The only way this is possible is if the bond will appreciate in value. When the bond appreciates, the investor gets more money back than she paid. The easy way to remember this is use the teeter-totter. [Module 5, Municipal Securities, Section 8.5]

74

Which of the following is true of municipal bonds originally issued at par?

A. The yield to maturity is equal to the coupon rate. B. The yield to maturity is less than the coupon rate. C. The yield to maturity is more than the coupon rate. D. This is undeterminable.

Correct Answer: A. The yield to maturity is equal to the coupon rate.

The yield to maturity is equal to the coupon rate. This is true because there is no appreciation in the price of the bond from a discount price to face value, nor is there any loss since the purchase price is at face value. The current yield and the basis, or yield to maturity, will both be equal to the coupon, or nominal yield. This is true anytime a bond is selling at par. If the bond is selling above par, both the current yield and basis go below the coupon rate. If the bond is selling below par, both the current yield and basis go above the coupon rate. [Module 5, Municipal Securities, Section 8.0]

75

The Port of Oakland is offering $100 million of revenue bonds with maturity dates from 2010 to 2024. The bonds will pay interest on January 1 and July 1, and will begin paying interest July 1, 2010. The bonds maturing in 2011 have an interest rate of 5 1/2% and have a yield to maturity of 5.60%. This means the bonds were originally offered at:

A. Par B. A discount C. A premium D. None of the above

Incorrect! The correct answer is: B. A discount

A discount. These bonds are offered at a discount because the yield to maturity of 5.6% is greater than the nominal interest of 5.5%. (Think teeter-totter.) Therefore, if the yield is above the coupon, or nominal yield, the price is below par, or below $1,000. When yields are up, prices are down, and when yields are down, prices are up. [Module 5, Municipal Securities, Section 8.5]

76

Which of the following is not true of industrial revenue bonds?

A. Local municipal governments issue them. B. Private corporations use them to finance the purchase of pollution control equipment. C. Their credit rating is determined by an analysis of the municipal government issuing the bonds. D. Interest is paid from rents received from private corporations.

Correct Answer: C. Their credit rating is determined by an analysis of the municipal government issuing the bonds.

Correct answer (false statement): Their credit rating is determined by an analysis of the municipal government issuing the bonds. Industrial revenue bonds are not rated by an analysis of the municipality, but rather by the chance of default because the facility will not have the revenues. The other three statements are true of industrial revenue bonds even though they are not really issued by the municipality; they just have municipal status for interest rate purposes. [Module 5, Municipal Securities, Section 2.3]

77

Municipal bonds that are trading flat are trading with which of the following?

A. With all unpaid coupon payments due to the buyer B. With only the unpaid coupon payments due the seller C. With current interest payments due only D. With no interest payments due

Incorrect! The correct answer is: A. With all unpaid coupon payments due to the buyer

With all unpaid coupons payments due to the buyer. All unpaid coupons from the past, plus all present and future coupons, must be attached so that the buyer, who is buying and taking a chance, can get recouped for any interest payments in default. The seller does not pay the buyer, as the issuer will pay the buyer, if interest payments are paid the next payment. Current interest payments are in default, so they are not due. Remember, all interest bearing bonds require the payment of interest when due. The only bonds that do not require an interest payment are zero-coupon bonds -- they do not pay interest. This bond is not a zero-coupon bond; therefore, "with no interest payments due" is a false statement, since the interest payments are due. When they get paid is the concern of the buyer. The seller receives nothing. If interest will ever be paid, all unpaid coupons will be paid off as well. [Module 5, Municipal Securities, Section 8.5]

78

How is interest computed on a municipal bond?

A. 30/365 days B. 30/360 days C. 31/360 days D. Actual days elapsed

Incorrect! The correct answer is: B. 30/360 days

30/360 days. Municipal and corporate bond interest is computed using 30-day months and 360-day years. Government bond interest is computed on actual days elapsed using a 365-day year. The other two answers are nonsensical. [Module 5, Municipal Securities, Section 8.6]

79

The Port of Miami is offering $100 million of revenue bonds with maturity dates from 2012 to 2032. The bonds will pay interest on January 1 and July 1, and have a dated date of May 1, 2011. The bonds being issued are:

A. Term bonds B. Income bonds C. Series bonds D. Serial bonds

Incorrect! The correct answer is: D. Serial bonds

Serial bonds. In this example, the Port of Miami's revenues fund is serial bonds. The phrase "with maturity dates from 2012 to 2032" tells you that it is a serial bond. A revenue bond can only be a municipal bond. Since it is a serial bond, it cannot be a term bond. If Miami has issued other bonds, it could be a series bond; if Miami has never issued bonds, it would not be a series bond. Do not assume anything that is not written in the question. Income bonds (that only pay if there is income) are corporate bonds. [Module 5, Municipal Securities, Section 3.2]

80

All of the following statements are true about revenue bonds, except:

A. Interest is paid from the earnings of the facility for which the bond was issued. B. Interest is exempt from federal taxes. C. Revenue bonds are considered riskier than general obligation bonds. D. Revenue bonds have lower interest costs than general obligation bonds.

Incorrect! The correct answer is: D. Revenue bonds have lower interest costs than general obligation bonds.

Correct answer (false statement): Revenue bonds have lower interest costs than general obligation bonds. Contrary to this, revenue bonds have higher interest costs because they are riskier. Revenue bonds have no guaranteed payments -- they pay the interest from the earnings only; thus, if there are no earnings from the new facility, the payment cannot be met. GO bonds, on the other hand, are backed by a guaranteed payment -- taxes collected from property owners. Like GO bonds, revenue bond interest is municipal bond interest, and thus is exempt from federal taxes and often from that state's taxes as well. [Module 5, Municipal Securities, Section 2.3]

81

Which of the following Moody-rated bonds should be considered speculative?

A. Aaa B. Aa C. Baa D. Ba

Incorrect! The correct answer is: D. Ba

Ba. High-grade bonds are Aaa and Aa; medium grade are Al, A, and Baa, and speculative are Ba. C-rated bonds are usually bonds in default of interest. [Module 5, Municipal Securities, Section 5.6]

82

You have an investor who only wants a bank qualified municipal bond. What is the lowest rating that a municipal bond can have for you to recommend the bond to that investor?

A. C B. BB C. BBB D. A1

Incorrect! The correct answer is: C. BBB

BBB. This is the lowest rating of a municipal bond that is considered bank qualified, better known as investment grade. All bonds from S&P's AAA down to BBB and Moody's Aaa down to Baa are considered bank qualified. Moody's A1 is above the BBB rating, and the other two are below the minimum rating to be investment grade. [Module 5, Municipal Securities, Section 5.6]

83

A municipal revenue issue will set forth the flow of funds in which of the following documents?

A. Tombstone advertisement B. Official statement C. Notice of sale D. Trust indenture

Correct Answer: D. Trust indenture

Trust indenture. The trust indenture outlines all of the obligations of the issuer -- the name of the trustee and what is to be done with the revenues from the facility. It also states what actions the bondholders have to take if the issuer defaults. [Module 5, Municipal Securities, Section 5.1]

84

A tax-free municipal bond fund has contacted a municipal bond broker/dealer to purchase $200,000 of a particular municipal bond. The municipal bond broker/dealer sets up a joint account with two other broker/dealers to purchase bonds for the account. Which of the following solicitations would be allowed?

A. All three firms publish individual advertisements with all the names of the members of the joint account and each is showing the pricing of the securities at the agreed pricing. B. Two of the members publish an advertisement in a regional newspaper with the two firms' names and the price at which they want to buy the bonds. C. All of the member firms publish advertisements showing the names of all members of the joint account and each has their firm's pricing of the securities. D. One of the members publishes an advertisement in a local paper where that broker/dealer has an office showing the firm is looking for the bonds.

Correct Answer: A. All three firms publish individual advertisements with all the names of the members of the joint account and each is showing the pricing of the securities at the agreed pricing.

All three firms publish individual advertisements with all the names of the members of the joint account and each is showing the pricing of the securities at the agreed pricing. All advertising must show all members of the joint account and only one price can be used. If each member priced the bonds differently, they would cause competition and would not have a fair market. [Module 5, Municipal Securities, Section 11.4]

85

A legal opinion issued by a municipal bond attorney will state all of the following, except:

A. That interest is exempt from federal income taxes B. Information about maturities, coupon rates, and call features if the bond is callable C. A statement that the bond constitutes a legal and binding debt of the issuing municipality D. A guarantee by the bond attorney that the interest will be paid when due

Correct Answer: D. A guarantee by the bond attorney that the interest will be paid when due

Correct answer (false statement): A guarantee by the bond attorney that the interest will be paid when due. No one can guarantee interest or appreciation on a bond or any other security. A bond attorney is retained by the municipality to determine the legality of the bond from an investor's point of view. [Module 5, Municipal Securities, Section 5.5]

86

A 5.55% municipal bond is quoted on a 5.30 basis. The Fed changes interest rates, prices drop, and the bond changes 15 BiPs. What is the new quote for the bond?

A. 5.15 basis B. 5.45 basis C. 5.415 basis D. 5.285 basis

Correct Answer: B. 5.45 basis

5.45 basis. BiPs are basis points, which is a yield to maturity "basis." Since the prices are dropping, the yield is increasing -- thus the basis increases. The new basis is 15 BiPs higher than the previous quote, and thus 5.30 + .15 = 5.45. [Module 5, Municipal Securities, Section 7.2]

87

All of the following are included in the indenture of a municipal revenue issue, except:

A. Re-offering yields B. Flow of funds C. Rate covenants D. Name of the trustee bank

Incorrect! The correct answer is: A. Re-offering yields

Correct answer (false statement): Re-offering yields. Re-offering yields are yields to maturity where the underwriter is offering the bonds to the public -- they are never included in the indenture of any bond. The indenture of a bond outlines the rights and duties of the bondholder as well as the rights and duties of the issuer. The issuer is never responsible for the secondary market prices of securities. [Module 5, Municipal Securities, Section 5.1]

88

A double-barreled municipal bond is backed by:

A. The revenues of a facility B. The taxes of a municipality C. The revenues of a facility and taxes of a municipality D. The double payout requirement of a municipality regarding its debt obligations

Correct Answer: C. The revenues of a facility and taxes of a municipality

The revenues of a facility and taxes of a municipality. A double-barreled bond is backed by both the revenues and the taxing power of the municipality. It is the means of paying for the bond, not the requirement of what has to be paid by the municipality for the debt obligations. [Module 5, Municipal Securities, Section 2.3]

89

A municipality's debt limit is:

A. The maximum amount of interest a municipality can pay out in one year B. The maximum amount of bonds a municipality can redeem in one year C. The maximum amount of debt a municipality can incur D. None of the above

Correct Answer: C. The maximum amount of debt a municipality can incur

The maximum amount of debt a municipality can incur. The debt limit is the top limit a municipality can owe (in principal). The debt limit has nothing to do with the interest the municipality can pay in a year or the amount of bonds it can redeem in one year. [Module 5, Municipal Securities, Section 2.2]

90

What is the primary source of revenue for the payment of principal and interest on a public housing authority bond?

A. Rental income revenues B. Bonds to be issued in the future C. Property taxes D. Guarantees of the U.S. government

Correct Answer: A. Rental income revenues

Rental income revenues. The federal government backs a public housing authority bond, but it is ultimately paid for by rents on the housing project for which the bond was issued. [Module 5, Municipal Securities, Section 2.1]

91

Which of the following is true of the Bond Buyer's Revenue Index?

A. It is composed of 30 bonds. B. It is composed of 20 bonds. C. It is composed of 25 bonds. D. It is composed of 11 bonds.

Correct Answer: C. It is composed of 25 bonds.

It is composed of 25 bonds. Although the Bond Buyer is shown on the Bond Buyer site daily, it only publishes the various indexes once a week. The revenue index is composed of 25 revenue bonds with 30 years or more to maturity. There are three general obligation indexes: The GO 11, the GO 20, and the GO 40, all with bonds maturing in 20 years. [Module 5, Municipal Securities, Section 6.4]

92

A municipal bond is considered in good deliverable form unless which of the following were true of the bonds?

A. A legal opinion is written on the certificate. B. The CUSIP number is not legible. C. The registered bond lacks proper endorsement. D. The bonds are in $5,000 denominations.

Incorrect! The correct answer is: C. The registered bond lacks proper endorsement.

The registered bond lacks proper endorsement. That the bonds are in $5,000 denominations is perfectly fine. Legal opinions must always be attached, if it is not printed on the front or the back of the certificate. However, registered bonds MUST always be properly endorsed, even if the CUSIP number is illegible. Not properly signing the bond certificate renders the bonds undeliverable. The CUSIP number has no bearing on good delivery. [Module 5, Municipal Securities, Section 11.1]

93

When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be to:

A. Improve their quality B. Decrease their quality C. Make them ineligible to become bank qualified D. Increase their yields

Incorrect! The correct answer is: A. Improve their quality

Improve their quality. If any of the bonds are called, all the bonds of that issue are improved. The outstanding bonds improve because the municipality is able to cover some of the issue now, and thus will have no trouble in the future. Since the bonds are now safer, the prices will rise and their yields will go down. Because there are fewer bonds, more money to pay for them, and they are safer, they become "bank qualified" if they weren't already. This means that banks can now invest in them because of their safety. [Module 5, Municipal Securities, Section 8.7]

94

A municipal bond backed by the charges for tolls of a tunnel or turnpike would be a:

A. Housing authority bond B. General obligation bond C. An industrial revenue bond D. Revenue bond

Incorrect! The correct answer is: D. Revenue bond

Revenue bond. Bonds backed by the tolls and charges of a facility are revenue bonds. Industrial revenue bonds must generate revenues from a private corporation doing public work (pollution control, etc.). General obligation bonds are backed by taxes, and the U.S. government backs housing authority bonds. [Module 5, Municipal Securities, Section 2.3]

95

The Federal Reserve Board has raised the discount rate from 2 1/4% to 2 3/4%. The dollar value of outstanding bonds will probably:

A. Go up B. Remain stable C. Go down D. This is undeterminable

Correct Answer: C. Go down

Go down. The bond prices must go down. When interest rates rise, prices drop. Remember the teeter-totter. It is undeterminable how much the prices will decrease, but they will go down. [Module 5, Municipal Securities, Section 8.5]

96

A new customer to your municipal bond firm opens an account. Upon looking at the application, the customer works for another broker/dealer, although that broker/dealer does not trade in municipal bonds. Which two of the following actions are you and/or your firm required to take?

I. Notify the new customer that her signature is required to open an account
II. Send duplicate confirmations and statements to the customer and the employer
III. Tell the customer that her employer will be notified of the opening of the account
IV. Ask the employee for any instructions regarding the sending of duplicate confirmations to her employer

A. I and II B. III and IV C. II and III D. II and IV

Incorrect! The correct answer is: C. II and III

II and III. Every time an employee of another firm opens an account at your firm, your firm will notify the employing firm and you must tell the customer that the employer will be notified. Your firm is required to send duplicate confirmations and statements to the customer and the customer's employer. Some firms do not allow their employees to open accounts at other broker/dealers. A customer's signature is not required to open an account and the employee should not be asked for instructions regarding sending duplicate confirmations to her employer. [Module 5, Municipal Securities, Section 11.1]

97

The flow of funds in a municipal revenue issue is outlined in the:

A. Offering circular B. Notice of sale C. Prospectus D. Indenture

Correct Answer: D. Indenture

Indenture. The flow of funds is how the issuing municipality will use the funds. This is always outlined in the indenture part of the official statement. The indenture is a part of the official statement and is not a special area of the statement. The offering circular and the prospectus are for stock offerings. The notice of sale is information from the issuer to prospective underwriters asking them to bid on the underwriting of a new issue. [Module 5, Municipal Securities, Section 5.1]

98

A municipal broker/dealer is part of a joint account that is offering a block of bonds. The broker/dealer firms that are part of the joint account can do all of the following, except:

A. Publish advertisements in local newspapers showing the members of the account and the bonds that are being offered B. Send sales advertisements to institutional purchasers of municipal bonds showing the bonds with the names of the members participating in the joint account C. Send individual advertisements to their clients showing the bonds as being offered by that firm D. Publish advertisements in national newspapers showing the bonds and listing the names of the members of the joint account

Incorrect! The correct answer is: C. Send individual advertisements to their clients showing the bonds as being offered by that firm

Correct answer (false statement): Send individual advertisements to their clients showing the bonds as being offered by that firm. When there is a municipal bond joint account, all the members must be shown in any advertisement, whether in a local or major newspaper, or to institutional and individual investors. Usually, this would be a syndicate member in an underwriting, but this could also be a joint account of two or three member firms selling a large quantity of a secondary offering of bonds. [Module 5, Municipal Securities, Section 11.4]

99

MSRB rules apply to all of the following, except:

A. Municipal bond salespeople B. Municipal bond underwriters C. Municipal bond firms D. Municipal bond issuers

Incorrect! The correct answer is: D. Municipal bond issuers

Municipal bond issuers. Municipal bond issuers are not regulated by MSRB rules. The issuers are just the people paying interest on the bonds. Because underwriters, salespeople, and firms all sell the bonds, they must follow MSRB regulations. [Module 5, Municipal Securities, Section 11.0]

100

The number of times the earnings of a facility exceeds the principal and interest charges for a period of time is called the:

A. Working capital ratio B. Debt service coverage C. Dividend payout ratio D. Net direct debt ratio

Incorrect! The correct answer is: B. Debt service coverage

Debt service coverage. The number of times the earnings of a facility exceeds the interest charges is called the debt service coverage. The debt service coverage is determined by dividing the total earnings minus expenses by the interest and principal due for the year. Working capital is on a balance sheet, as is the dividend payout ratio. The net direct debt ratio is for a general obligation bond to determine how much debt there is per capita. [Module 5, Municipal Securities, Section 9.4]

101

A municipal bond is selling at a discount. What is the order of the following from lowest to highest?

I. Current yield
II. Yield to call
III. Nominal yield
IV. Yield to maturity

A. IV, II, I, III B. III, I, IV, II C. III, I, II, IV D. III, II, IV, I

Incorrect! The correct answer is: B. III, I, IV, II

III, I, IV, II. The order from low to high is nominal, current (basis), yield to maturity, yield to call. If this were a premium bond, the question would go from high to low and the same order would be true.
[Module 5, Municipal Securities, Section 8.0]

102

In the purchase or sale of a municipal bond in the secondary market, a broker's broker will act:

A. As an agent for a customer in the sale of out-of-state bonds B. As an agent for a dealer in the purchase of bonds C. As a dealer for a customer who is purchasing bonds D. As a dealer for a broker who is selling bonds

Incorrect! The correct answer is: B. As an agent for a dealer in the purchase of bonds

As an agent for a dealer in the purchase of bonds. A broker's broker helps other broker/dealers buy and sell bonds. Broker's brokers do not deal directly with customers, but if the customer were to use a broker/dealer to sell bonds out of state, the broker/dealer would probably use the broker's broker to do the trade. For the test, a broker's broker never acts as a dealer. [Module 5, Municipal Securities, Section 7.1]

103

Municipal securities transactions require the written approval of which of the following?

A. The client B. The municipal principal C. Any principal of the firm D. The registered rep

Incorrect! The correct answer is: B. The municipal principal

The municipal principal. For any municipal transaction, a muni principal must approve the order on the day the order is entered. Not just any principal, because this is a municipal security. For options, an ROP is required. Municipal securities require a municipal principal. All other securities require a general securities principal. The registered rep has entered the order, so the only one who is responsible for approval of orders on municipal bonds is the municipal principal. [Module 5, Municipal Securities, Section 11.1]

104

When a bond is purchased at a discount under MSRB Rule G-15, all of the following must be reported on the confirmation of a municipal bond trade, except:

A. The yield to maturity B. The yield to call, if there is a call date C. If the bonds are in registered or book-entry form D. Whether the broker/dealer firm acted as a principal or an agent

Incorrect! The correct answer is: C. If the bonds are in registered or book-entry form

Correct answer (false statement): The bonds are in registered or book-entry form. The confirmation MUST state if the bonds are in book-entry, but does not have to state if they are in registered form. Since this choice is half correct and half false, it is incorrect. The confirmation for bonds purchased at a discount must show the yield to maturity. The yield to call does not have to be shown unless the bonds are callable, and if the bonds are callable, that fact must be noted as well. In addition, whether the broker/dealer acted as a principal or agent in the transaction must be included on the confirmation. If the bond is at a premium, then either the yield to maturity or the yield to call -- whichever is lower -- must be shown. If the yield to maturity is lower, the yield to call must also be shown. If the bond is at par, then no yield is shown, because the yield to call, the yield to maturity, and the coupon rate are all the same. [Module 5, Municipal Securities, Section 11.1]

105

The bond counsel does all of the following, except:

A. Supply facts for the official statement B. Determine the legality of the issue C. Pay for the printing of the bonds D. Negotiate a new law to assist in getting legislation to allow the sale of the issue

Correct Answer: C. Pay for the printing of the bonds

Correct answer (false statement): Pay for the printing of the bonds. The bond counsel does not pay for the printing of the certificates or any other printing for that matter. The bond counsel only gives opinions and works with the laws. [Module 5, Municipal Securities, Section 5.5]

106

Denver has issued serial bonds that are redeemable prior to maturity. If the municipality were to call some of the bonds, how would it determine which bonds if the sinking fund were to be selected?

A. The bonds would be picked by random lot. B. The bonds would be picked by decreasing numerical order. C. The bonds would be picked by inverse chronological order. D. The bonds would be picked by the ones with the highest coupon rates.

Correct Answer: C. The bonds would be picked by inverse chronological order.

The bonds would be picked by inverse chronological order. Serial bonds are called in inverse chronological order. Term bonds are called by random lot. [Module 5, Municipal Securities, Section 8.8]

107

A 15-year municipal bond is purchased at a $150 discount. The bond is held until maturity and redeemed. Which of the following statements is true for federal tax purposes?

A. The annual interest is exempt, and the gain is taxable as ordinary income. B. The annual interest is not exempt, and the gain is tax exempt. C. The annual interest is exempt, and the gain is tax exempt. D. The annual interest is not exempt, and the gain is taxable as ordinary income.

Correct Answer: A. The annual interest is exempt, and the gain is taxable as ordinary income.

The annual interest is exempt, and the gain is taxable as ordinary income. Municipal bond interest is always exempt. The gain now has to be accreted annually, although it does not have to be claimed until the bond matures or is sold. If the bond is held to maturity, the whole amount of discount (the gain) will be taxed as ordinary income. If the bond is sold prior to maturity, the bond is accreted to the new cost basis, and the capital gain or loss is determined from that point to the sale price. This is tested with a zero-coupon bond purchased at a discount, held for one year, and sold. The investor ends up with ordinary income and capital gain. [Module 5, Municipal Securities, Section 10.1]

108

Which of the following is not a municipal bond rating service?

A. Standard & Poor's B. Moody's C. Best's D. Fitches'

Correct Answer: C. Best's

Best's. Best's rating service rates insurance companies. All of the other three choices rate municipal bonds, with Fitches being the latest and smallest. However, Fitches is also the most solvent of the three listed. [Module 5, Municipal Securities, Section 5.6]

109

The Marin Municipal Water District has issued a $55 million MMWD 5% water revenue bond. The bond is issued with a net revenue pledge. Which of the following is paid first out of the revenues taken in by the water district?

A. Debt service B. Renewal and replacement C. Mandatory sinking fund D. Maintenance

Incorrect! The correct answer is: D. Maintenance

Maintenance. The first dollars are used to pay the maintenance in a net revenues pledge requirement for a revenue bond. If the type of pledge were a gross revenue pledge, then debt service would be correct. The other two are further down in payment. Remember -- the maintenance costs are paid first in a net revenue pledge and the debt service is always first with the gross revenues pledge. [Module 5, Municipal Securities, Section 5.3]

110

Which of the following best describes an inverted yield curve?

A. When the nearer maturities have lower yields than the later maturities B. When the nearer maturities have higher yields than the later maturities C. When all maturities have the same yield D. When the yield fluctuates

Incorrect! The correct answer is: B. When the nearer maturities have higher yields than the later maturities

When the nearer maturities have higher yields than the later maturities. An inverted yield curve starts with the first year's yield high and then the yield on successive maturities decreases, usually with the last four to six years all about the same. [Module 5, Municipal Securities, Section 8.4]

111

Who determines the tax status of a municipal bond?

A. IRS B. SEC C. Bond counsel D. Underwriter

Incorrect! The correct answer is: A. IRS

IRS. The IRS determines the tax-exempt status of a municipal bond. The bond counsel assesses the tax status of a municipal bond to see if the interest is tax-exempt or not. The SEC has nothing to do with it. [Module 5, Municipal Securities, Section 10.1]

112

Which of the following would least likely purchase a municipal bond?

A. An individual B. A bank C. An insurance company D. A company's profit-sharing plan

Correct Answer: D. A company's profit-sharing plan

A company's profit-sharing plan. Since municipal bond interest is tax-exempt, and the profit-sharing plan pays no taxes, there is no benefit in purchasing municipal bonds. All the others are historically large purchasers of municipal bonds. [Module 5, Municipal Securities, Section 10.2]

113

A bond that matures at stated intervals rather than maturing at one time period is termed:

A. Series bond B. Debenture C. Serial bond D. Convertible bond

Incorrect! The correct answer is: C. Serial bond

Serial bond. Serial bonds mature at different intervals. They are bonds by the same issuer (company) sold at one time that come due in different years. Series bonds are different issues by the same company. Debentures are "good name bonds" and convertible bonds may be converted into stock. [Module 5, Municipal Securities, Section 3.2]

114

Which of the following bonds will change the most in price when interest rates are rising?

A. 7% bond with six years to maturity B. 14% bond with 15 years to maturity C. 5% bond with nine years to maturity D. 15% bond with three years to maturity

Incorrect! The correct answer is: B. 14% bond with 15 years to maturity

14% bond with 15 years to maturity. Always pick the longest bond. The longest bond always move the most since it makes up the amount over the years. [Module 5, Municipal Securities, Section 8.4]

115

A municipal securities broker's broker engages in which of the following activities?

A. Executes trades for retail customers B. Underwrites municipal securities for retail sales C. Transacts on an agency basis in municipal securities only D. Executes trades for the firm's own account and sells to other broker/dealers

Incorrect! The correct answer is: C. Transacts on an agency basis in municipal securities only

Transacts on an agency basis in municipal securities only. A broker's broker does not execute trades for retail customers. A municipal securities broker/dealer will call a broker's broker to locate bonds or execute trades for customers of the broker/dealer. A broker's broker does not act as a principal to purchase and sell municipal bonds. A broker's broker acts as a broker. They are best known for executing trades for other brokers and institutions. [Module 5, Municipal Securities, Section 7.1]

116

Which two of the following statements are true regarding a discretionary order for the purchase of 50,000 municipal bonds issued by the city of Seattle, Washington?

I. Prior written authorization must be obtained.
II. Every order determined by the registered representative and entered for the customer must be marked "discretionary."
III. A municipal principal must approve each discretionary order prior to the trade being entered.
IV. A municipal principal does not need to approve a discretionary account prior to entering a discretionary order.

A. I and II B. II and III C. II and IV D. III and IV

Incorrect! The correct answer is: A. I and II

I and II. Prior written authorization must be obtained and every order determined by the registered representative and entered for the customer must be marked "discretionary." The municipal account does have to be approved before any trades can be executed, but the orders only have to be approved before the end of the day that they were entered. The orders must be approved on the same day, but not necessarily before the trade takes place. [Module 5, Municipal Securities, Section 11.1]

117

For which of the following reasons might a customer have his broker/dealer do a bond swap of municipal bonds?

I. To sell at a loss and buy back a similar bond to avoid a wash sale
II. To decrease income from the bonds being held
III. To decrease the quality of bonds in the portfolio
IV. To generate a gain that can offset a loss on the stock portfolio

A. I and III B. II and III C. II and IV D. I and IV

Correct Answer: D. I and IV

I and IV. To sell at a loss and buy back a similar bond to avoid a wash sale and to generate a gain that can offset a loss on the stock portfolio. These are just two reasons a customer might swap municipal bonds. There is even the possibility of increasing the par values, if the bonds the investor holds have increased and other bonds are priced so low that the investor can increase the amount of bonds he/she owns. However, it is doubtful that a customer would want his broker/dealer to perform a bond swap of municipal bonds to decrease the quality of bonds in his portfolio or decrease income from bonds being held. A bond swap probably would be done, though, to increase income from bonds being held or to increase the quality of bonds in the portfolio. [Module 5, Municipal Securities, Section 10.1]

118

A municipality is issuing a $2 million new bond. The city has $5 million in bonds outstanding and is responsible for 50% of the county debt of $10 million. If the population of the city is 30,000, what is the per capita net debt, including the new bond issue?

A. $333 B. $400 C. $3,333 D. $4,000

Incorrect! The correct answer is: B. $400

$400. To calculate this amount, add the city's debt plus its portion of the county debt and divide by the population. In this case:


2,000,000 (new debt)
5,000,000 (previous debt)
+ 5,000,000 (the city's portion of the county's debt: 50% of $10 million)
$12,000,000

12,000,000 divided by 30,000 = $400 per person.
[Module 5, Municipal Securities, Section 9.1]

119

Who assesses the tax status of a municipal bond?

A. IRS B. SEC C. Bond counsel D. Underwriter

Incorrect! The correct answer is: C. Bond counsel

Bond counsel. The bond counsel assesses the tax status of a municipal bond to see if the interest is tax-exempt or not. The IRS determines the tax-exempt status. The SEC has nothing to do with it. [Module 5, Municipal Securities, Section 5.5]

120

What is the current yield of a Dallas, Texas 6% general obligation bond selling for 90 that has 10 years to maturity?

A. 6% B. 6.67% C. 15% D. 67%

Correct Answer: B. 6.67%

6.67%. The current yield is the coupon divided by the current market price. In this case, 6% = $60, and the price of 90 = $900. 60 divided by 900 = .0667 or 6.67%. [Module 5, Municipal Securities, Section 8.2]