Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

Series 7 > Chapter 14- Municipal Bond Basics > Flashcards

Chapter 14- Municipal Bond Basics Flashcards

(60 cards)

Start Studying
1
Q

Municipal Bonds are issued by…

A

State and local government entities (schools, towns, cities, counties, authorities and the state)

Three types: General obligation (GOs), Revenue, and Notes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

General obligation (GOs) Bonds

A

AKA Full Faith and Credit Bonds

Backed by taxes and the taxing authority of the municipality

Issued for facilities that will benefit the public (schools, parks, city hall, etc)

Must first be put on a ballot and vote on by the public

Statutory debt limits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Revenue Bonds

A

Primarily backed by user charges (tolls bridges airport fees). can also be backed by lease payments, licensing fees (hunting fishing etc) and special taxes (ie. cigarettes, and liquor taxes)
Backed by protective covenant
There needs to be a flow of funds provision
No voter approval needed
Must have a feasibility study completed to determine self-stability
Not statutory debt limit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Municipal Notes

A

Short term maturities
Used for interim or temporary financing
Most common are TANs, RANs, TRANs, and BANs
Tax anticipation note
Revenue Anticipation note
Tax and revenue anticipation note
Bond Anticipation Note

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

General Obligation vs. Revenue bond risk level

A

GO bond is safer since they are backed by taxes and not users charges (both are safe investments GO is just safer)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Municipal Bonds are at most risk from

A

Legislative risk. If legislators removed tax exempt status of municipal bonds there would be a large impact

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Benefits of Municipal Bonds

A

Interest is exempt from federal income taxes
Interest may be exempt from state and local taxes
Principal and interest payments are fixed
Wide rage of issuers and maturities
Geographic diversification

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

State and Local GO income

A

State is typically through sales taxes and income tax

Local is typically through property taxes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Real Estate has two values

A

Market and assessed values

taxed on assessed value on mills ($0.001)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Limited Tax Bonds

A

AKA Limited Tax General Obligation Bonds

GOs Bonds that put a statutory limit on the tax rate that may be levied

These bonds require voter approval like all GOs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

GO Credit Analysis look at the following to consider a GO bond

A

Outstanding Debt
Per-Capita Debt
Debt to Value Ratio
Debt to Property Value Ratio
Character of Economy
Tax Collection Records
Property Valuation
Tax Rates
Unfunded Liabilities
Operation Deficits
Attitude of municipality towards debt
Population demographics
Budget Practices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Important when evaluating different municipality bonds

A

For obligation bonds - debt to value ratio is important
Budgetary practices are also important

for revenue bonds - debt servicing coverage is important
Feasibility studies, covenants and competing facilities are also important

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Direct debt vs overlapping debt

A

Direct debt is debt for which the municipality is solely responsible

Overlapping debt is debt for which more than one municipality is responsible for. Always at the local level and always supported by taxes

Never have overlapping debt at the state level, only local level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Revenue Bonds have become increasingly popular in recent years because…

A

Does not require a vote

does not count towards constitutional or statutory limit on debt

not payable thru taxes and will not increase taxes at a later date and time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Double barrel bonds

A

When a bond is back by revenues as well as the full faith and credit of the municipality it is called a double barrel bond

safer then revenue bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Indenture aka

A

Bond indenture or Trust indenture

Describes the rights and duties of the municipality as well as the trustee

The trustee represents the bond holder

Includes the reserve fund needs and the rate schedule

prepared by the bond council not the underwriter or syndicate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Protective Covenants

A

Maintenance Covenants - Require the facility is kept in good working order
Debt Service / Rate - Requires the issuer to charge a fee that is sufficient to meet all financial requirements plus a margin of safety (10% or higher)
Insurance - Insurance must be maintained on the facility. this will be included with a catastrophic call covenant in case there is a major insurance claim and the project is condemned.
Financial report covenant
consulting covenant
Anti discrimination covenant
Additional Bond Covenant - Closed end means they can not issue additional bonds
Open end means they can issue additional bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Gross Revenue flow of funds order

A

Services bond principal and interest first
Then services maintenance of the facility

Not a good structure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Net revenue Pledge bond flow of funds

A

O- operations and maintainence fund
B - bond service account for pricipal and interest
D - Debt Service reserve or sinking fund
R - Reserve maintenance fund for Renewal and Replacement (irregular maintenance)
S - Surplus fund for excess revenues

OBs are DR.S

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Credit Worthiness of a Revenue Bond

A

Purpose for which they are issued
competing facilities
coverage ratio
rate covenant

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Funded (or Capitalized) Interest

A

Additional capital used from the issuance of the bond in order to pay interest t the bond holders during the construction of the facility before it is generating revenue to pay them itself

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

New Housing Authority bonds and Public Housing Authority bonds (PHAs) are the

A

bonds issued to local housing authority (low income of subsidized housing)

Interest and principal is paid from rents collected (primary revenue)

Backed by Public Housing administration, which is a department of HUD. This makes them the only muni bond backed by the US government

Safest form of revenue bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Special Assessment Bonds

A

principal and interest is payable from an assessment on the benefitted property

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Special Tax Bonds

A

Paid for from taxes paid from excise (luxury) taxes levied on purchases of certain products like alcohol and tobacco

A new tax was put on cigarettes to pay for the construction of a new cancer research hospital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Lease Rental Lease Revenue Leaseback Bonds
A municipality will form an authority to sell bonds and construct municipal faculties (Schools, court houses etc.) The authority then leases the facility back to the city/school district. The revenue from the bond is considered the lease not tax assessments
26
Industrial Development Bonds
The municipality approves the sale of bonds for a corporation to construct a facility. The corporation is responsible for repaying the bond, not the municipality Don't to benefit some corporation when the municipality doesn't want them to move out. Very risky form of Municipal Bond
27
Moral Obligation Bond
Issued when a municipality is either in bankruptcy or in financial difficulties If the authority can not pay then the state legislative appropriations would be needed for the municipality to pay the bond, but they could refuse to do so This is the other very risky form of municipal bond
28
Build America Bonds (BABs)
Taxable Municipal Bonds Used for infrastructure rebuilding Can not be used to refinance debt Subsidized interest payment. Either the federal government pays back 35% of the interest paid to the municipality or the bondholder takes a federal tax credit equal to 35% of the interest expenses Expanded market to pension plans and foreign investors since they did not need the tax free benefit of municipal bonds
29
Zero Coupon municipal bonds...
May be issued for both GOs and revenue bonds Are the most sensitive and volatile of all municipal bonds Are exempt from federal tax (and possibly state tax) but must be reported annually You determine if it is being sold at a discount or premium by comparing it's current yield to its original yield May be callable, if so it is typically at 102% of accreted value
30
Private Activity Bonds
Municipal bonds issued to finance private activities for the public good, such as waste management or water treatment facilities Typically subject to taxation or AMT preference item tax
31
Reasons for refunding Municipal Bonds
1. lower the interest costs 2. to change the maturity or amortization 3. the liberalize the bonds indenture provisions
32
Provisions of a pre-refunding
will be used to redeem bonds at their earliest call date can only be done within 90 days of the call date Sometimes referred to as a current refund redemption price or call price can be more than the par value of the bond
33
Provisions for Advanced refunding
used with bonds that are not callable New bond must remain outstanding for at least 90 days
34
Advance Refunding, why? yes or no
It is done to restructure debt issue to remove restrictive covenants to reduce interest costs improve the quality rating of the original issue NOT DONE to pay municipalities expenses Earn profits on the spread from original bond interest rate and new bond interest rate
35
Municipal notes
Are a short term debt instruments used for temporary or interim financing
36
Types of municipal notes
Most common TANs - Tax anticipation notes RANs - Revenue anticipation note TRANs - tax and revenue anticipation note BANs - Bond anticipation Note GANs- Grant anticipation Note Less common Construction Loan Notes Demand Notes Tax-exempt Commerical Papers, 270 days maximum (this is never used to refund outstanding bonds)
37
Some investment companies invest only in municipal bonds. They would be
Unit investment trusts or Bond funds
38
Municipal Bond Unit trusts charactieristics
AKA- Tax exempt units Each trust is created by an indenture can tender a certificate for payment at any time As the bonds mature or are called the size of the trust is reduced no portfolio manager (regular bond funds will have an active manager and be open ended, UTIs do neither of these things)
39
Municipal Bond are always delivered with...
a legal opinion printed on the bond
40
The legal opinion on a municipal bond determines
the tax free status of the bond (most important) That they are legally issued by the issuer Prepare and examine original drafts by the issuer before they are formally adopted Examine the bonds to see they are properly executed Covers US treasury departments arbitrage regulations DOES NOT pay for or review the printing of the bonds
41
Legal opinion on a municipal bond is written by
A reputable law firm hired by the ISSUER
42
Bond Counsel reviews what to determine legality of bond issue
The municipalities local statutes Judicial opinion The constitution of the state Legislation and procedures of the state DOES NOT need legislative approval for a bond issue
43
Municipal Bond Attorney can never
guarantee that principal and interest payments will be paid on time for a particular issue Does not considering the re-offering bond yields when forming an opinion
44
Qualified vs. unqualified opinions
Qualified opinions are bad- means that the bond is conditional on some future event to incur tax exemptions Non-qualified- is absolute and unconditional. Indicates the bond is legal, valid, binding and tax free
45
Serial Bound Charateristics
Bonds are issued all at the same time Bonds have staggered maturity dates There is typically a balloon payment at the end Since they have different maturity dates they will have different yield to maturities. This difference is called the scale Like a bowl of cereal. Pour in the cereal all at once. take bites as time passes, drink all the milk at the end
46
Term Bonds
Bond issues with the same maturity dates called dollar bonds since they are quoted in dolllars instead on their yield Sinking fund provisions are usually connected with term bonds When average life of a bond is less then the maturity date then part of the issue was already called When a partial call is made it is done randomly
47
Variable Rate demand bonds (auction rate demand bonds)
Bond with an interest rate that is reset (daily, weekly, monthly) Also allow the bondholder to put the bonds back to the dealer when they are reset, for par plus accrued interest rates Issued at par in $100,000 increments Generally do not have reinvestment risk but still hold liquidity risk and default risk
48
Tender offer
When the issuer wants to retire bonds that are not callable offers to buy back bonds from bond holders Announces a price that they are willing to pay which will usually be a premium to the value of the bond
49
Bond Repayments
Can be done with either cash from the issue of a new bond or exchanged for new issue bond for each original bond
50
Bond Call features
allow redemption of the bond according to a fixed price schedule prior to the maturity date Most revenue bonds are callable Most GOs are not callable Callable bonds will have a higher coupon becuase of the call feature Prior notice of a call is required When quoting a bond to an investor you always quote the worst possible yield
51
When bonds are trading at a premium...
yield to call will always is the worst case scenario
52
Repurchase agreements
Sold by a firm with the agreement to repurchase them at a set price on a set date Usually short term
53
Parity bonds
When a new issue of bonds have an equal claim or rights as other bonds that were previously issued
54
MIG Ratings
Moody's investment grade- these are used to evaluate and grade the quality of municipal notes a MIG-1 rating is similar to a AAA rating on a bond
55
Different ways to diversify in bonds
Geographically Maturity Purpose Security Quality Denominations is not considered a way to diversify
56
Effects of inflation on bonds
INflation causes INterest rates to INcrease, causing bond prices to go down
57
Risks in the municipal bond market
Interest rate risk Inflationary (purchasing power) risk Market risk credit risk reinvestment risk regulation risk political risk
58
Municipal Bond Insurance Companies
3 Companies- National Public Finance Guarantee Corp Assurance Guaranty Municipal Corp Build America Mutual Assurance Corp
59
Why have municipal bond insurance
Allows municipality to pay a lower interest rate on bond Guarantees against default and guarantees the payment of principal and interest Is not done to change credit rating and does not guarantee the issuer or bonds credit rating
60
Letter of credit
Is considered a credit enhancement Bank commits to paying principal and interest if the issuer is unable to make their payments

Series 7 (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions