Chapter 4 Flashcards
(26 cards)
Blue Sky Laws
Covered Securities
Blue sky law - state law that regulates offering and sale of securities in order to protect investors against fraud.
Covered securities - Securities that are exempt from state registration. Includes most municipals as well as exchange-listed securities and mutual funds.
What are the two ways unsold issues are allocated among members?
Easter (undivided account) each underwriter is given an allotment to sell. If some members still have unsold bonds, then the remaining bonds are re-allocated according to their proportional share.
Western (divided account) - Each underwriter is responsible only for its own allocated amount.
Eastern eats the group’s losses - Western walks away from the others
How do you calculate tax equivalent yield incorporating state taxes?
If the bond is taxable in the state, then you only use the federal rate.
If the bond is tax-exempt, then you divide by both federal rate and the state rate because you get to deduct both.
What rules must be included in the syndicate letter?
1) Written statement of all terms and conditions required by issuer
2) Priority provisions and procedure by which such provisions can be changed
3) Whether the syndicate manager may allocate securities on a case-by-case basis, other than in accordance with priority provisions
4) Whether orders may be completed with written confirmation prior to end of the order period.
What is the credit spread?
Spread between two bonds of similar maturity, but different credit quality.
A narrowing spread signals an expansion, as lower credit bonds are seen as less risky and decrease their yields relative to higher credit bonds.
How do you calculate the total number of bonds?
Take the par amount and divide it by 1,000
How do you calculate NIC?
(Total Interest Payments +/- Discount/premium)
Divided by total bond year dollars
How long is the typical order period?
One hour to five days.
How do you calculate average life of a bond?
Total bond years/total number of bonds
What are the components of GDP
GDP measures all finished goods and services produced within the geographic boundaries of a country
Measurements include: personal consumption expenditures, business investments, imports/exports, government spending
How do you calculate bond year dollars?
Multiply the years to maturity by the par value at each maturity. Sum these up.
Year 1 - $1,000 = $1,000 bond years dollars
Year 2 - $1,000 = $2,000 bond years dollars
Total = 3,000 bond year dollars
How do you identify the adjusted cost basis of a bond?
Take the annual accreted/amortized amount and multiply it by the number of years that you’ve held the bond. Add this number to the cost basis (what you paid for it) to get the adjusted cost basis.
Describe the distribution of spread to syndicate members
Managers Fee = 1/8 of total spread, Total Takedown = 7/8 of total spread
Total takedown = additional takedown + concession
Concession is what is given to selling group.
Additional takedown is what the member keeps for selling its portion.
What factors should be considered when pricing bonds?
How it compares to similar bonds in the market
Availability of securities in the market
Credit rating of the issuer
Expense and service provided in effecting the transaction.
Lagging indicators
- CPI
- Business spending
- Unemployment report
- Prime rate charged by banks
- Bank loans outstanding
- Employment Cost Index
How do you calculate bond years?
Divide the number of bond year dollars by $1,000
$3,000 bond year dollars = 3 bond years
What are the timelines for communicating to syndicate members?
within 24 hours of sending commitment wire - synidcate manager must complete allocation of securities
withint two business days of date of sale - disclose to other members of the allocations having priority
within 10 days of sale date - all information on designated orders paid to the syndicate
Later of 15 days of sale date or 3 business days after notification of “set aside” - Amount of takedown that was set aside to other members of the syndicate.
What are broker’s brokers not allowed to do when conducting soliciting bids on an issue?
1) May not have municipal securities in proprietary or other accounts
2) May not engage in self-dealing (trade for its own account)
3) Must not encourage a bid that is not representative of the market value
4) May not give privileged information to a bidder
5) May not change a bid or offer price without the bidder or seller’s permission
6) Accept a changed bid if they indicated that the bidder’s bid was the high bid
7) Can only communicate to bidder and winning bidder until bid-wanted is complete. Can make information available to all market participants equally at no cost.
How are discount bonds taxed?
At time of sale, if the discount is above the de minimis amount, then it will be taxed as ordinary income.
If the discount is less than the de minimis amount it is taxed as a capital gain.
What are the essential elements of a private placement?
Offered to no more than 35 sophisticated investors
Uses offering memorandum containing 1) Issuer’s objectives; 2) terms of the bond and its risks; 3) financial statements; 4) debt service requirements
Requires investor letter acknowledging risks associated with securities being purchased
Leading indicators
- Business inventories
- Initial claims for unemployment
- New manufacturing orders for consumer goods
- Building permits
- Inflation adjusted money supply (expansion)
- Credit spread (narrowing signals expansion)
- Performance of S&P 500 (expansion)
- Consumer Spending Index (expansion)
- Consumer confidence (Expansion)
What information may be included in the bond resolution?
1) Project description
2) Estimated cost
3) financing plan
4) Issuer’s duty to the bondholders
5) Pledge of full faith and credit
How are OID discounts and secondary market discounts treated differently for tax purposes?
OID discounts are not taxed if they are held until maturity. Must report the annual accreted value on taxes.
2nd market are taxed at your ordinary income rate even if they are held to maturity.
How do you calculate the de minimis amount of a bond?
.25% X Principal Amount X years
e.g. .25% X 1,000,000 X 20 = $25,000
