From Test Questions Flashcards
(186 cards)
1
Q
Undivided / Eastern Account
A
Each underwriter accepts responsibility for selling any shares that remain unsold by other members of the syndicate.
2
Q
Divided / Western Account
A
Each underwriter accepts responsibility for selling any shares that remain unsold by other members of the syndicate.
3
Q
If sales of a municipal new issue by each syndicate member are used to extinguish liability of the group as a whole, then this indicates the account is an undivided/eastern account.
A
Explanation - An Eastern Account is undivided as to selling responsibility and undivided as to liability. Since sales of bonds by each syndicate member are used to extinguish liability of the group as a whole, the account is an undivided or Eastern account.
4
Q
If a customer in the 28% tax bracket is considering the purchase of a municipal bond yielding 8% or a corporate bond yielding 11% and both bonds have similar maturities and credit ratings, is the effective yield higher on the municipal bond or corporate bond?
I
A
It is higher on the municipal bond.
In order to compare the tax free municipal yield to the taxable corporat
5
Q
Who determines the amount of tax credit provided to QZAB bondhholders?
A
IRS
6
Q
Investors that purchase municipal discount bonds in the primary market must acrete the bonds. If they are held to maturity, the full discount has been accreted and the adjusted bases is par. Since th bonds are redeemed at par, there is no gain or loss.
A
7
Q
Municipal premium bonds purchased in the primary market must be amortized. If they are held to maturity, the full premium has been amortized and the adjusted basis is par. Since the bonds are redeemed at par, there is not capital gain or loss.
A
8
Q
Acrete
A
To grow together; adhere
9
Q
What information is found in a municipal bond resolution:
A
-Any restrictive covenants to which the issuer must adhere
-Any call provisions providing for redemption prior to maturity as specified in the contract
-The credit rating assigned to the issue by a nationally recognized ratings agency
10
Q
What is a Bond Resolution?
A
The contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions. The credit rating is given by the ratings agencies (e.g., Moody’s or S&Ps).
11
Q
Where is the underwriter’s compensation disclosed to investors in new negotiated municipal bond offerings?
A
In the Official Statement (the disclosure document, similar to a prospectus, for new municipal issues)
12
Q
If a municipal bond is issued at a premium, whether on the primary or secondary market, the premium must be amortized on a straight line basis over the life of the bond. This results in an annual reduction in interest income received (non-taxable), and a downward adjustment in the bond’s costs basis towards par. Also note that there is no tax deduction permitted for the annual amortization amount. At maturity the cost basis has been adjusted to par. The bond is redeemed at par, so there is not capital gain or loss.
A
13
Q
A new municipal bond is purchased at 105. What does this mean?
A
The premium must be amortized on a straight line basis over the life of the bond.
14
Q
Are GO bonds subject to debt limits?
A
Yes
15
Q
Are Revenue bonds/Industrial Revenue bonds subject to debt limits?
A
No
16
Q
Are GO bonds non-self supporting debt or self supporting debt?
A
Non self supporting debt
17
Q
Are revenue bonds / industrial revenue bonds non-self supporting debt or self supporting debt?
A
Self supporting (i.e., they pay their own way from collected revenues)
18
Q
Voter approval is needed for a municipality to sell GO bonds (non-self supporting debt) in an amount that exceeds the municipality’s constitutional limit. Revenue bonds and industrial bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections.
A
19
Q
What does an “additional bonds test” mean?
A
It means the issuer is prohibited from issuing new bonds against the revenues of a facility that have the same lien (“party lien”) against pledged revenues, unless the facility’s revenues are sufficient. There is no prohibition on selling bonds that have a junior claim (meaning they are paid after) the existing bonds. In all bond issues there is a prohibition on selling debt that has a senior claim to that of the existing bondholders.
20
Q
In all bond issues there is a prohibition on selling debt that has a senior claim to that of the existing bondholders.
A
21
Q
To perform an additional bonds test, typically, the debt service on the old bonds is added to that of the new bonds. The revenues of the facility must cover, by an adequate margin, the combined debt service before additional bonds can be sold.
A
22
Q
What does an “additional bonds test” prevent the issuer from doing?
A
- Issuing parity bonds unless the facility’s revenues are sufficient to pay for existing and proposed debt
- Issuing senior lien bonds unless the facility’s revenues are sufficient to pay for existing and proposed debt
- Issuing bonds with the same lien on pledged revenues unless the facility’s revenues are sufficient to pay for existing and proposed debt
23
Q
What is a contractual source of liquidity for a VRDO where the issuer is first in line to purchase tendered bonds?
A
Standby letter of credit
24
Q
The credibility of the put feature is based on the quality of the liquidity support which is provided by either a letter or credit, backed by a bank, or a standby bond purchase agreement, also backed by a bank. In a standby LOC, the issuer is the first source of liquidity with the bank as a back-up. In a direct LOC, the bank is the first source of payment. The issuer would be liable if the bank fails to meet its obligation to provide liquidity.
A
25
Net Interest Cost (NIC) Method
-One method companies use to compare binds from underwriter syndicates
-One way to compute overall interest expense of a bond issue
-Takes into account any premium or discount applicable to the issue (i.e., whether the bond is selling above or below face value)
-Factors in the dollar amount of coupon interest, which is the periodic rate of interest paid by the issuers to its purchasers over the life of the bond
-Expressed as a %
-It does not consider the time value of money
26
True Interest Cost (TIC)
-A calculation for the cost of a municipal issuer's interest expense that includes the Time Value of Money (TVM)
-Takes the Time Value of Money (TVM) into consideration
-Includes all ancillary fees and costs (e.g., finance charges, possible late fees, discount points, and prepaid interested) along with factors related to the TMV
27
What is True Interest Cost (TIC) also known as?
Internal Rate of Return or the Net Effective Interest Rate
28
Calculating Net Interest Cost (NIC)
NIC = (Total Interest Payments + Discount - Premium)/Number of Bond - Year Dollars
29
Net Interest Cost (NIC) example:
Company ABC wants to calculate the net interest cost (NIC) on its most recent bond issue. If total interest payments on the debt total $4,000,000, the premium was $250,000, and the number of bond-year dollars is $100,000,000, then the net interest cost (NIC) formula would be:
Net interest cost = ($4,000,000 - $250,000) / $100,000,000 = .0375 or 3.75%.
30
What is Net Interest Cost's (NIC) biggest flaws?
It doesn't incorporate the Time Value of Money (TVM)
31
What is the Time Value of Money (TVM)?
The concept that money available today is worth more than the same amount in the future, due to its potential earning capacity
32
Applying True Interest Cost (TIC) to Securities Exams:
When a municipal issuer of securities is considering bids by underwriters to sell their new issue of municipal bonds, they will often consider the TIC of the required interest payments. The true interest cost takes into account the fact that payments made in later years will be made with dollars that are less valuable than the dollars today. The fact that inflation erodes the value of the dollar over time will reduce the issuer's TIC.
33
Applying Net Interest Cost (NIC) to Securities Exams:
NIC is the total of all interest payments made by a municipal issuer over the life of all of the bonds and does not take into account the Time Value of Money.
34
Under the TIC method, the TIC is defined as the interest rate necessary to discount the amounts payable on the respective principal and interest payment dates to the purchase price received for the new bonds. In essence, the TIC method considers the Time Value of Money while the NIC does not.
35
A 3% bond, maturing in 2030, is sold to a customer on a yield basis. The bond is callable beginning 10/1/20 at 102, with additional calls each year thereafter at declining premiums. As of 10/1/24, the bond is callable at par. Just prior to the trade date, the issuer has announced that it intends to pre-refund the entire issue to the 10/1/20 call date and price under MSRB Rule G-15, the dollar price is calculated to lower or higher the price to maturity?
It is calculated to lower the price to maturity or price to call.
36
Under MSRB Rule G-15, dealers cannot price a bond to a pre-refunding call date and price until the funds have actually been placed in escrow to complete the pre-refunding. Therefore, the basic rule applies - the bond must be priced to the lower of price to maturity or price to call.
37
The price of a bond and its yield to maturity (YTM) have an inverse relationship, meaning that as a bond's price increases, its YTM decreases, and vice versa. This is because a bond's price is determined by the market and fluctuates based on interest rates and credit ratings.
38
The engineering exclusion applies to advice regarding which three things?
1. A projected in-service date
2. Anticipated funding requirements of a project
3. Project revenues
39
In the engineering exclusion, engineers are excluded to the extent they are providing engineering advice. The provision of feasibility studies that include certain types of projection that are based on the engineering aspects of a project are all within the scope of the exclusion.
40
When do arbitrage rebate payments need to be made on Form 8038-T?
No later than 60 days after the end of every 5th bond year throughout the term of the issue.
41
What does the arbitrage payment need to be equal to?
At least 90% of the amount due as of the end of that 5th bond year.
42
Upon redemption of the bond issue, when does the arbitrage balance need to be paid?
Within 60 days of redemption
43
Arbitrage
An economic and financial strategy that involves profiting from price differences in the same asset across different markets.
44
How does arbitrage work?
It involves simultaneously buying and selling the same or similar asset in different markets to take advantage of price differences. The profit is the difference between the market prices at which the asset is traded.
45
The tax equivalent yield of a municipal bond will vary depending on the tax bracket of the customer
46
The tax equivalent yield of a municipal bond will changes as the market price of the bond varies
47
What is the "cover" in a municipal competitive bid?
The increment by which the Net Interest Cost (NIC) of the next highest bid exceeds that of the winning bid.
-It is the increment between the NIC bid and the next highest NIC bid.
-It is normally quite small
48
Example of the "cover" in a municipal competitive bind:
If the winning syndicate bid 2.00% for a new municipal issue, and the next highest bid by another syndicate is 2.20%, the cover is .20%.
49
If the "cover" in a municipal competitive bid is large, it indicates that the winning syndicate is either extremely aggressive in its bid, or may wind up taking a loss on the bonds when it reoffers them to the public.
50
Minor Portion Rule
If the lesser of $100,000 or 5% of the proceeds of the issue is invested at a yield materially higher than that on the bonds, it's OK. This portion will not be treated as arbitrage bonds.
51
A portion of an issue of bonds will NOT be treated as arbitrage bonds if an amount which is the lesser of $100,000 or 5% of the proceeds of the issue is invested at a yield which is materially higher than the yield on the bonds.
52
What is the spread on a competitive bid municipal bond offering?
The difference between the bid and "production"
53
The spread on a competitive municipal bond offering is the difference between the bid amount and the expected amount that the issue will sell for when it is reoffered (the "production"). The "cover" is the difference between the winning bid and the next highest bid.
54
The MSRB limits gifts related to your activities as a registered representative to $100 value per person per year. The rules permit business related entertainment, as long as such entertainment would qualify for an IRS deductions, and as long as the entertainment is not too excessive or frequent.
55
When determining the Net Interest Cost (NIC) in a competitive bid municipal bond sale, is any premium added to or subtracted from the NIC?
It is subtracted from the NIC
56
When determining the Net Interest Cost (NIC) in a competitive bid municipal bond sale, is any discount added to or subtracted from the NIC?
It is added to the NIC
57
When awarding a bid, the issuer deducts any premium paid by the underwriter from the total interest cost to arrive at the NIC. Conversely, the issuer adds any discounts taken by the underwriter to the total interest cost to arrive at the NIC. The lowest NIC wins the bid.
58
How often should an advisor's compliance policies and supervisory procedures be reviewed under Rule G-44?
At least once per year.
59
What does Modified Duration measure?
The price fluctuation of a bond to interest rate changes.
60
Modified Duration measures the price fluctuation of a bond to interest rate changes. Bonds with longer maturities tend to react more to rate changes than bonds with shorter maturities. Further, when rates fall, a bond with a call feature will not react as much as a non-callable bond. The call feature puts a ceiling on the price rise of a callable bond.
61
Macaulay Duration
-The weighted average time until repayment
-A metric that measure the average time it takes to receive a bond's cash flows, or the weighted average of the time to reach each cash flow.
62
Minor Portion Rule
Bonds will not be treated as arbitrage bonds if an amount which is the lesser of $100,000 or 5% of the issue is invested at a yield higher than the yield on the bonds.
63
Net Bonded Debt
Net bonded debt of a municipal issuer includes all bonded debt except for self supporting revenue bonds. This is the debt that must be served from tax collections. Self supporting revenue bonds pay their own way and are not paid from tax collections. Non-self supporting revenue bonds (e.g., a double barreled bond that is payable from revenues and taxing power if necessary) are included in Net Bonded Debt.
Also note that partially self supporting GO bonds are GO bonds issued on behalf of an enterprise system (e.g., health care facility), where debt service is paid by revenues of the system and a GO pledge - another double-barreled bond. Moody's and S&P's include partially self supporting GO bonds in net bonded debt. Note, however, if the GO bond is fully self supporting it would be excluded from net bonded debt.
64
Three things that are included in the Net Bonded Debt of a municipal issuer
1. Non-self supporting GO bonds
2. Partially self supporting GO bonds
3. Non-self supporting revenue bonds
65
When a customer buys a municipal bond in the primary market at a discount, is the discount accreted or my be accreted at the option of the bondholder?
it is accreted.
66
When a customer buys a municipal bond in the primary market at a discount, is the discount taxable or not taxable?
It is not taxable
67
If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its bases is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to part. Since it is redeemed at par, there is not capital gain or loss at maturity.
68
What two things need to be disclosed in negotiated municipal underwritings?
1. Spread
2. Initial offering price of each maturity
69
In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is not requirement to disclose the names of the underwriters (though this information is readily available) nor their participation amounts (since this in no way affects the customer)
70
What will a municipality do if they believe interest rates will rise and they want to lock in current rates prior to a bond issuance?
Enter into an interest rate swap
71
Credit Default Swap (CDS)
A financial contract where the seller agrees to pay the buyer if a debt defaults or there's another credit event. The buyer pays the seller a premium over time, similar to an insurance policy. CDSs can be used to hedge risk, speculate, or arbitrage. They can cover many risks, including bankruptcies, defaults, and credit rating downgrades.
72
CDS is a form of insurance, protecting the issuer, for example, from negative credit events such as a ratings downgrade. Selling interest rates calls will be profitable if rates fall. Likewise, buying T-bond futures will also be profitable if rates fall. The municipality will enter into an interest rate swap where it will pay fixed and receive floating (it will be the payer). The parties do not swap their entire interest payments. Rather, they make payments to one another based on the rise or fall of the floating interest rate. If the rates rise as the issuer expects, it will benefit because its fixed rate is unchanged and the receiver now owes the issuer the difference between the fixed rate and the floating rate.
73
If a municipal bond, callable at par, is quoted on a yield basis that is higher than the nominal yield, the price of the bond to a customer would be calculated on what?
Yield to Maturity
74
Regarding a bond purchased at a discount: the yield to call will be the highest effective yield. Under MSRB rules, bonds are priced on a worst case basis, meaning in this case where the discount is earned over the longer period of time. Theis occurs is the bonds are held to maturity. If the bonds are called, the yield actually improves on the bonds, since the customer earns the discount faster.
75
Yield to Maturity (YTM)
-The overall interest rate earned by an investor who buys a bond at the market price and holds it until maturity.
-Mathematically, it is the discount rate at which the sum of all future cash flows (from coupons and principal repayment) equals the price of the bond.
-YTM is often quoted in terms of an annual rate and may differ from the bond’s coupon rate. It assumes that coupon and principal payments are made on time. It does not require dividends to be reinvested, but computations of YTM generally make that assumption. Further, it does not consider taxes paid by the investor or brokerage costs associated with the purchase.
76
Yield to Call (YTC)
Figured the same way as YTM, except instead of plugging in the number of months until a bond matures, you use a call date and the bond's call price. This calculation takes into account the impact on a bond's yield if it is called prior to maturity and should be performed using the first date on which the issuer could call the bond.
77
Yield to Worst (YTW)
Whichever of a bond's YTM and YTC is lower. If you want to know the most conservative potential return a bond can give you—and you should know it for every callable security—then perform this comparison.
78
Yield to Put (YTP)
The interest rate that investors would receive if they held the bond until its put date.
79
Put bonds generally have a lower yield than comparable bonds without a put option. This is because the issuer needs to compensate for the risk of having to repurchase the bond before maturity
79
Bonds with a put option are called put bonds or putable bonds. The put option gives the bondholder the right to sell the bond back to the issuer at a fixed price on a specified date.
80
Current Yield
Refers to the ratio of a bond's annual interest payment to its current market price. It's also known as interest yield, income yield, flat yield, market yield, mark to market yield, or running yield.
81
To calculate current yield, divide the bond's coupon rate by its market price.
82
Current yield and price have an inverse relationship, so as the price of a bond increases, its yield decreases.
83
If the current market price of a bond changes, its current yield will also change.
84
Current yield doesn't assume that coupon payments can be reinvested, while effective yield does
85
Current yield shows the interest rate that a bond delivers, which is an important number for investors.
86
Put bonds offer protection against rising interest rates. If interest rates rise, the bondholder can sell the bond back to the issuer and reinvest the proceeds at a higher interest rate
87
YTW is calculated by considering all possible call dates and assuming that the issuer will take any action that could negatively impact the bond's yield, such as calling the bond early.
88
The YTC is based on the assumption that the issuer will call the bond on the call date. If the bond is not called or market conditions change, the YTC may differ from the bond's actual return
89
YTW is often used for callable bonds, which are bonds that the issuer can pay back early
90
YTW is always less than or equal to the yield to maturity (YTM), because it represents a return for a shorter investment period.
91
Spread-to-worst (STW) is a metric that's often used in conjunction with YTW to compare the YTW of a bond to a U.S. Treasury security
92
Yield to call
Definition
The return an investor receives when holding a callable bond until its call date
Formula
P = (C / 2) x {(1 - (1 + YTC / 2) ^ -2t) / (YTC / 2)} + (CP / (1 + YTC / 2) ^ 2t)
Variables
P = current market price, C = annual coupon payment, CP = call price, t = number of years remaining until the call date
Importance
Helps investors compare callable bonds to other investments
93
YTM is calculated by discounting a bond's cash flows back to the present day to equal the bond's price. It's based on the following assumptions:
-The bond buyer will hold the bond until maturity
-The investor will reinvest each interest payment at the same interest rate
-Coupon and principal payments are made on time
94
YTM differs from a bond's coupon rate, which is fixed, while YTM fluctuates based on the bond's price and interest rates
95
YTM is one of the most common ways to measure a bond's ability to generate income. Investors can use YTM to determine if a bond is a good investment and to estimate its interest rate risk.
96
What basis is accrued interest on municipal issues calculated?
30 day month / 360 day year
97
A municipal revenue bond is issued with a net revenue pledge. From the reserve maintenance fund, the flow of funds then goes into the Renewal and Replace fund
98
What is the order and priority of disbursing pledged revenues, for a net revenue pledge?
1. Revenue fund
2. Operation and maintenance fund
3. Debt service fund
4. Debt service reserve fund
5. Reserve maintenance fund
6. Renewal and replacement fund
7. Surplus fund
99
All municipal bonds, whether original issue premium or trading market premium bonds, are subject to straight line amortization. A 5 point premium must be amortized over 5 years, so 1 point per year is amortized (with no tax deduction allowed for the annual amortization amount). After 2 years, the bond has an adjusted cost basis of 103 (105 purchase - 2 points total amortization). Since the bond is being sold at 105, the capital gain is 2 points.
100
A $10,000 municipal bond with 5 years maturity is purchased in the secondary market at 105. The bond is sold after 2 years at 105. What is the taxable gain or loss?
A 2 point capital gain
101
An underwriter would violate Rule G-17 if it discouraged a municipal entity from using a municipal advisor or otherwise implied that hiring an advisor would be redundant because the underwriter can provide the same advisory services.
102
In what types of offerings must the spread in a new municipal bond issue be disclosed to customers?
-Competitive bid offerings
-Negotiated offerings
103
The MSRB only requires spread disclosure to investors in negotiated offerings. No disclosure is required for competitive bid deals, since the spread in such deals is typically very thin.
104
A customer buys a new municipal issue from an underwriter on Tuesday, January 18, with settlement taking place on Wednesday, January 19. The bond is dated January 1. How many days of accrued interest must be paid by the customer to the underwriter?
18
105
Interest accrues from the dated date on a new issue up to, but not including the date when the first trade settles. Since settlement is on January 19, interest accrues through the 18th. Counting from the January 1st dated date through January 18th, 18 days of accrued interest are payable from the buyer of the bond to the seller (the underwriter in this case).
106
Bank qualified municipal bonds are small dollar issues (less than $10,000,000) of GO bonds. If a bank invests in these bonds, it is given a substantial tax break - 80% of the interest cost of carrying bank deposits that funded the purchase of those bonds is tax deductible to the bank, yet the interest income received from the bonds is free of Federal income tax. This benefit is only available on bank qualified issues.
107
If a bank wishes to make an investment in municipal bonds, which is the most advantageous security?
Bank qualified GO bonds
108
As part of its due diligence, the underwriter of GO bonds discovers that the municipal issuer has not made the requisite filings on EMMA regarding its annual and event information on an outstanding bond issue. The underwriter then advises the issuer to take corrective action such as completing the missed filings and adopting supervisory procedures to ensure future compliance. What does this action fall under?
The underwriter exclusion umbrella.
The SEC views this kind of activity as promoting compliance with the anti-fraud provisions of federal securities law. Therefore, reliance on the underwriter exclusion is appropriate.
109
Underwriter Exclusion Umbrella
110
The price of a callable bond = the price of a non-callable bond - the price of the call option.
111
The price of a puttable bond = the price of a non-puttable bond + the price of the put option.
112
The price of a callable bond will always be less than the price of a comparable non-callable bond. This translates into a higher yield for a callable bond which makes sense as the investor runs the risk of having bonds called away and being forced to reinvest the proceeds at a lower rate.
113
The price of a puttable bond will always be higher (lower yield) than the price of a comparable non-puttable bond. This makes sense as the issuer, in a rising interest rate environment, will likely be forced to buy back bonds at par. In return the issuer provides investors with a lower yield.
114
Callable Bond (aka Redeemable Bond)
A bond that the issuer can buy back before the bond's maturity date. The issuer has the right to call the bond, but not the obligation to do so.
115
When a bond is called, the issuer pays the investor the call price, which is usually the face value of the bond, plus any accrued interest.
116
In some cases, the issuer may pay a call premium to soften the loss of income from the call.
117
Callable bonds can be called on a predetermined schedule, such as monthly, quarterly, or annually.
118
Some bonds have a make-whole call provision, which requires the issuer to pay the investor a lump sum for the principal and the net present value of future coupon payments.
119
Putable Bond (aka Put Bond or Retractable Bond)
A debt instrument that gives the bondholder the right to force the issuer to repurchase the bond before its maturity date.
120
The put option is the embedded feature that gives the bondholder the right to exercise the bond early.
121
The bondholder receives the principal value of the bond at par value when the put option is exercised.
122
The put option can be exercised on specified dates or after a specified period.
123
Putable bonds help protect against rising interest rates and potential credit deterioration of the issuer.
124
The price of a putable bond is calculated by adding the value of the put option to the price of a conventional bond.
125
The value of a puttable bond is higher than a straight bond because of the put option.
126
Puttable bonds are different from callable bonds, which give the issuer the option to redeem the bond before maturity.
127
Municipal bonds, revenue or otherwise, are more often than not subject to multiple call dates and prices. Accordingly, they are not considered complex financings. On the other hand, VRDOs, forward delivery agreements, and swaps are examples of what the MSRB considers to be complex which requires additional disclosures to issuers
128
Under MSRB Rule G-17, what are the three financings considered to be complex municipal financings requiring particularized disclosures?
1. Variable rate demand obligations (VRDOs)
2. Forward delivery agreements
3. Interest rate swaps
129
Under MSRB rules, an annual update to Form A-12 is required within how many business days of calendar year end?
17 business days
130
A qualified tax-exempt obligation (aka bank qualified bond). A qualified small issuer is limited to offering up to $10 million annually and a bank can deduct ,for tax purposed 80% of the interest expense incurred to carry the bonds. Bank qualified obligations generally carry a lower rate of interest than comparable non-bank qualified bonds. Further, most private activity bonds are not eligible for issuance as bank qualified bonds.
131
Two true statements about bank qualified tax-exempt obligations:
1. A qualified small issuer is limited to offering up to $10 million annually
2. Bank qualified bonds carry a lower interest rate than comparable non-bank qualified bonds
132
The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required to be prepared by issuers by the MSRV, since the MSRV has no authority over municipal issuers. It is requested by underwriters to help sell the new issue and the MSRB states that if one is available, it must be given to purchases at or prior to settlement of the transaction.
133
Official Statement is:
1. not required by the Securities Act of 1933 because municipal issues are exempt securities
2. required to be delivered to all purchases of a new municipal issue at or prior to settlement, if available
3. requested by underwriters to satisfy the disclosure requirements of new issue purchasers
134
Municipal bonds that have been called:
1. interest sops accruing on the bonds
2. the call price sets a ceiling on the market price of the bonds
3. the holder may redeem the bonds at any time
135
If a bond issue is called, interest stops accruing as of the date specified in the call. Thus, the bond will now trade "flat" - that is without accrued interest.
136
The call price sets a ceiling on the market price of the bonds. Meaning, the market price of the bond will never go above the call price. If it did, and the bonds were called, investors would suffer a loss. The bond can be tendered anytime thereafter, at which point the bondholder will be paid par value plus any specified call premium.
137
The call price will not set the floor on the market price of the bonds as the market could go below the call price (which could occur if market interest rates started to rise).
138
What strategies would an institution wishing to hedge its long-term bond portfolio against an increase in interest rates like use?
Buy TYX calls AND Sell TYX puts
139
What strategies would an institution wishing to hedge its long-term bond portfolio against an increase in interest rates like use?
The basic option positions that gain when rates rise are buying calls and selling puts (these are contracts based on interest rate movement - not price movement). As the portfolio to be hedged is made up of long term bonds, the best hedge would be to use options based on the 30-year Treasury bond (TYX) rather than use options based on the 13 week T-bill rate (IRX).
140
Under MSRB Rule G-32, if the Official Statement is available from EMMA, then the delivery period extends to 25 days following the end of the underwriting period.
141
If the Official Statement is not available on Emma, then the period when the Official Statement must be available to customers extends to 90 days following the end of the underwriting period.
142
Macaulay Duration is equal to maturity in which bonds?
Capital Appreciation Bonds
143
Macaulay duration estimates, in years, how long it will take for future cash flows, both principal and interest, to repay the price of the bonds. It will always be less than the time to maturity with one exception: it is equal to maturity only if the bond is a zero coupon bond. A capital appreciation bond is a zero coupon bond.
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In an advance refunding, the issuer floats a new bond issue and uses the proceeds to "retire" outstanding bonds that have not yet matured. These funds are deposited to an escrow account and are used to buy US Government securities. The escrowed US Government securities become the pledged revenue source backing the refunded bonds. These bonds no longer have claim to the original revenue source. Since there is a new source of backing for the bonds (and an extremely safe one), the credit rating on the pre-refunding bonds increases, as does their marketability. The refunded bonds no longer have any claim to the original pledged revenues - and thus have been "defeased" - that is, removed as a liability of the issuer. (Note: Tax law changes that took effect at the beginning of 2018 eliminated the issuance of new advance refunding bonds. However, a large amount of these issues remain outstanding, and they still must be known for the exam.)
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What is the normal priority for handling municipal new issue orders is:
1. Pre-Sale Net
2. Group Net
3. Designated Net
4. Member Takedown
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Which method is Monetary Policy conducted through?
-Open Market Operations
-Setting Reserve Requirements
-Setting Margin Requirements
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Tax rates are set by Fiscal policy. Monetary policy tools include open market operations, setting reserve requirements, and setting margin requirements.
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Which policy sets tax rates?
Fiscal Policy
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Under Rule G-34, when must a financial advisor apply for a CUSIP number in a competitive offering?
No later than 1 business day after publication of the Notice of Sale
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Under Rule G-34, when must an underwriter apply for a CUSIP number in negotiated underwritings?
No later than the time the pricing information for the issue is finalized
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Under Rule G-34, when a financial advisor is not used, when must the underwriter apply for a CUSIP number in a competitive offering?
No later than receiving notification of the award
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Callable bonds:
-have negative convexity
-their yields are higher than yields on comparable non-callable bonds
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Negative Convexity
When rates rise, then price depreciates at a faster rate than the rate at which their price appreciates when rates fall. This is because the call price tends to put a lid on the amount by which a bond will appreciate in a falling interest rate environment. Also, because of the call feature which benefits issuers, yields on callable bonds are higher than those of comparable non-callable bonds. The higher yield compensates the investor for the possibility that the bond will be called away.
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Virtually all bonds with call features have negative convexity
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In order for an RFP to be exempt, it must adhere to the following:
1. it must be open for a specified period of time
2. it must define a particular objective
3. it must involve a competitive process
4. the municipal entity, obligated person, or a registered municipal advisor must conduct the RFP
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Under MSRB Rule G-9, records relating to persons responsible for supervision must be retained for how many years?
At least 6 years following any change in disposition
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A federally registered investment advisor:
-may not provide advice on municipal derivatives in connection with a municipal security offering
-may provide advice on municipal derivatives in an investment portfolio of a municipal entity
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Forward Contracts are not standardized and trace over-the-counter.
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Futures Contract
A legal agreement to buy or sell a standardized asset on a specific date or during a specific month that is facilitated through a futures exchange.
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Future Contracts are exchange-traded and are standardized
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A mini-RFP differs from a conventional RFP in that it is sent to at least 3 pre-qualified underwriting firms. Because a mini targets pre-screened candidate, it is not posted on the issuer's website nor is it submitted to EMMA.
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Forward Contract
A non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on in the contract
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Under MSRB Rule G-42, a municipal advisor, when dealing with an obligated person, is subject to a duty of care
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An investor is holding 20 N. Carolina GO bonds currently trading at part, the original issue price. If these bonds have a modified duration of 5 years and interest rates fall by 100 basis points, the value of the bonds would be estimated to be how much money?
$21,000 - A bond with a modified duration of 5 would be expected to lose 5% of its market value if interest rates rise by 100 basis points (1%). Should rates fall by 1%, the market value of the bonds should increase by 5%. Therefore, the $20,000 worth of GO bonds would be estimated to have a market value of $21,000 after a 100 basis point fall in rates.
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Full Cash Refunding (aka Gross Refunding)
A refunding in which the proceeds of the refunding bonds and other available money, without reinvestment, provides sufficient funds to pay debt service on the refunded bonds.
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The MSRB is empowered to create regulations for participants in the municipals market, but has no enforcement power. Enforcement is performed by the banking and securities regulators. The MSRB has set rules related to municipal recordkeeping and disclosure. It also sets guidelines for municipal firms to use when setting commissions and mark-ups to customers, so that the changes are fair.
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Weighted Average Maturity of a Bond Issue = bond years divided by number of bonds in the issue (the number of bond years is equal to the number of bonds times the number of years to maturity for each serial maturity; add up the number of bond years for the issue and divide by the number of bonds to calculate the weighted average maturity).
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A full cash refunding does NOT require interest earnings to pay debt service on the refunded bonds. If earnings are required, along with the proceeds of the refunding bonds and other available funds, it is a net cash refunding.
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Accrued Interest
-Includes the prior interest payment date
-Does not include settlement date
-Interest begins to accrue on the prior interest payment date and accrues up to but not including the settlement date.
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If a municipal advisor terminates its business or withdraws from registration as an advisor, how long must lifetime records be retained for?
3 years following withdrawal or termination
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Weighted Average Maturity is aka Average Life
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The 3 Lifetime Records, under MSRB Rule G-9, are:
1. Articles of Incorporation
2. Stock Certificate Books
3. Minute Books
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A person wishing to use the independent registered municipal advisor (IRMA) exemption must not have been associated with that IRMA for the prior 2 years.
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Written agreements relating to the business of the advisor must be kept for 5 years (MSRB Rule G-9).
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Direct Purchase refers to the private sale of municipal securities to a single investor (e.g., private fund, etc.)
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Under Rule A-11, for each registered professional it employs a municipal advisor is assessed an annual fee of $1,060.
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RFP Exemption
As long as the person responding to a RFP does not receive separate direct or indirect compensation for advice provided as part of the response, that person is exempt from having to register as a municipal advisor.
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A broker-dealer responding to a RFP from a municipality is exempt from having to register as a municipal advisor as long as the broker-dealer receives no compensation for advice provided as part of the response.
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Under Rule A-12, what is the annual affirmation period?
January 1 - January 31
This means that advisors must annually affirm the registration information disclosed on Form A-12.
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Non-callable bonds tend to have positive convexity.
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Callable bonds tend to have negative convexity.
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Who defines what constitutes a retail order in a municipal underwriting?
Issuer; municipal issuers are involved in determining which customer orders receive priority and defining what constitutes a retail order; issuers typically specify a retail order period that gets first priority to broaden retail distribution of the issue.
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