Ch 5 - Municipal debt Flashcards

Question

Syndicate members

Answer 1

Financial firm participating in the syndicate Take liability for unsold shares Typically a broker-dealer

Answer 2

Selling agent for the syndicate Do not take liability for unsold shares (when this grp sells a bond, syndicate member is compensated "additional takedown")

Answer 3

Difference between overall amount offered and capital given to the issuer Compensation for syndicate

Answer 4

Compensates lead underwriter for their services

Answer 5

Compensates syndicate members for liability

Answer 6

Compensates firm for selling a new issue Could be paid to syndicate members or selling group members can be earned by lead underwriter, since they can sell to their own customers

Answer 7

Earned by syndicate member if a sale is made Additional takedown and selling concession combined

Answer 8

Undivided syndicate All syndicate members share liability together

Answer 9

Divided syndicate Syndicate members are responsible for their sales only

Answer 10

PDGM / pretty good dinosaur movie Pre-sale Group net Designated Member

Answer 11

Represents bid made by lead underwriter Determines the yields of new bonds being offered

Answer 12

Cheapest underwriter wins the bid as determined by net interest cost (NIC) or true interest cost (TIC) TIC factors in the time value of money

Answer 13

Lead underwriter must settle within 30 days

Answer 14

lead u/w-er places bids thru estb reoffering yields on the bid form for competitive offerings

Answer 15

Considered a type of G.O. bond Only have access to predetermined tax allotments ( issuer doesn’t have any incentive to raise taxes if they are facing challenges paying off the bond ) ( ensures limited taxation to the taxpayers, who ultimately decide if a G.O. bond should be issued ) Riskier than typical G.O. bonds

Answer 16

Population demographics Economic diversity Municipal finances

Answer 17

Used to assess property tax obligation 1 mill = 0.1% = 0.001 (decimal form)

Answer 18

Assessed value x mill rate Does not utilize the market value

Answer 19

Reports and categorizes various forms of municipal debt -Direct debt ---All debt directly issued by a municipality -Net direct debt ---Direct debt minus self-supporting debt (revenue bonds) -Overlapping (coterminous) debt ---Debt shared with other municipalities -Net overall (total) debt ---Net direct debt plus overlapping debt

Answer 20

Make revenue to pay off borrowed funds

Answer 21

Paid off with revenues from municipal ventures Finance self-supporting municipal ventures No voter approval is required Not subject to debt limits

Answer 22

Forecast profitability of a municipal venture Created by independent consultants

Answer 23

Municipality builds corporate facility Corporate lease payments are used to pay off the bond Credit rating based on the corporation Potentially subject to AMT taxes

Answer 24

Municipality builds a municipal facility Department using facility leases facility, pays off the bond

Answer 25

Paid off with “vice taxes” (Alcohol, tobacco, gasoline) Proceeds do not have to benefit anything related to tax Non-self-supporting revenue bond

Answer 26

Fund improvements to specific parts of the municipality Local area taxes pay back borrowed funds Non-self-supporting revenue bond

Answer 27

Also known as Public Housing Authority (PHA) bonds Municipality builds low-income living facility Tenants pay what they can (rent) Federal government pays the rest Highest rated municipal bond (AAA rated)

Answer 28

Backed by moral obligation No legal obligation to pay off bonds State legislature may pay off bonds if revenues fall short (legislative apportionment)

Answer 29

Backed by revenue and property taxes If revenues fall short, property taxes kick in

Answer 30

Fully-taxable municipal bonds issued with federal credit Federal government subsidizes 35% of the interest Used to improve infrastructure during the Great Recession of 2008

Answer 31

Municipality gives up property to a third party and rents it back Investors purchase COPs to receive lease payments

Answer 32

Issuer chooses their preferred underwriter (firm or agency) Lowest cost underwriter is not required

Answer 33

Syndicate agreement for negotiated underwritings

Answer 34

Feasibility study Debt service coverage ratio

Answer 35

Performed by an independent third party Evaluates viability of proposed project or facility Considers: -Demand -Competition -Economic impact -Management structure

Answer 36

=(net operating income) / (debt service requirement) Measures ability to pay debts

Answer 37

Agreement between issuer and trustee Trustee works for the benefit of the bondholders Issuer makes promises (covenants) to bondholders Trustee sues issuer if the promise is broken

Answer 38

The issuer will properly insure the facility

Answer 39

The issuer will call bond if the facility is destroyed Typically enacted during “acts of god” or events out of the issuer’s control

Answer 40

Issuer maintains proper books and records Periodic audits are utilized to ensure legal compliance

Answer 41

Issuer won’t provide special rates to any party using the facility

Answer 42

Establishes the rate to be charged for services or goods sold Rates will rise if needed to cover debt service

Answer 43

Facility will be properly maintained

Answer 44

allows additional senior level bonds to be issued if earnings test is passed If not passed, can issue additional junior (subordinated) bonds

Answer 45

Only junior bonds may be additionally issued

Answer 46

Bondholders (debt service) paid first Operations and maintenance second higher DSCR due to not deducting operat & ain't DSCR = revenue (no minus costs) / debt service

Answer 47

Operations and maintenance paid first Bondholders (debt service) paid second

Answer 48

Requires issuer to redeem small portions of outstanding bonds prior to maturity (like a call feature) (yet diff from call in terms of: not entire issue being redeemed, only a portion) used to prove creditworthiness of issuer and reduce their financial burden at maturity The issuer may do the following to meet sinking fund requirements: -Force the redemption at a predetermined price -Buy back bonds from the market

Answer 49

Requires trust indentures for non-exempt issues of $50 million or more Does not apply to municipal issues enforced by SEC

Answer 50

Short-term municipal debt Paid off with future municipal cash flows

Answer 51

Paid off with future tax collections Typically property tax-related

Answer 52

Paid off with future revenues from municipal ventures

Answer 53

Combination of TANs and RANs

Answer 54

Paid off with money raised by a future bond issue

Answer 55

Paid off with future federal grants

Answer 56

Municipal debt with short-term redemption (put) option Resetting interest rates on a periodic schedule Not significantly impacted by interest rate fluctuations *resettable coupon *with put option

Answer 57

Higher levels of liquidity risk No short sales (usually trade with residents of same municipality) (trades OTC)

Answer 58

Typical for municipal bonds Provide yield, not price Ex: "7% municipal bond trading on a 5% basis" The first percent quoted (7%) is the coupon, while basis (5%) is another way of saying yield to maturity (YTM).

Answer 59

Tax-free income for residents Most securities are safe from default

Answer 60

Revenue bonds have a higher risk of default than G.O. bonds Liquidity risk Low yields (opportunity cost)

Answer 61

Investors seeking income Wealthy investors at high tax brackets not suitable for to be put into retirement

Answer 62

TFEY = Corp. yield x (100% - tax bracket)

Ch 5 - Municipal debt Flashcards

(86 cards)