Municipal Bonds

Question 1

Serial Bonds

Answer 1

Bonds with different maturity dates, quoted on a Yield-to-Maturity (YTM) Basis

Question 2

Term Bonds

Answer 2

Bonds that come due at the same time, quoted on a price (usually % of par)

Question 3

All municipal securities trade…?

Answer 3

Over the counter (OTC)

Question 4

Minimum Spread when trading bonds

Answer 4

1/8 of 1 Bond Point = $1.25 ($10/8)

Question 5

1 Bond Point = $?

Answer 5

$10

Question 6

If bonds are trading at a premium, the bond is quoted at…?

Answer 6

Yield-to-Call (YTC)

Question 7

Interest rate is also known as …?

Answer 7

Coupon or Nominal Yield

Question 8

How often do bonds pay out?

Answer 8

Semiannual

Question 9

Dated Date

Answer 9

Date the bond starts to accrue for the next time frame

Question 10

Legal Opinion

Answer 10

Bond counsel (usually a firm, not an individual)

Question 11

What does the Legal Opinion consist of?

Answer 11

Legislative authority, federal tax exemption, exemption from ‘33 Act (provision of an Official Statement)

Question 12

What types of Legal Opinions are there?

Answer 12

Qualified with reservations, Unqualified without reservations, Ex-Legal (Muni Bond trading w/o Legal Opinion)

Question 13

What are the different types of Municipal Bonds?

Answer 13

General Obligation (GO) and Revenue

Question 14

What ratings are “investment grade”?

Answer 14

AAA, AA, A, BBB

Question 15

What ratings are not “investment grade”?

Answer 15

Anything below BBB

Question 16

What are the different kinds of debt involved in GO Bonds?

Answer 16

Overlapping Debt, Coterminus (two taxing agencies share geographic boundaries, able to issue debt separately)

Question 17

What is a Collection Ratio?

Answer 17

Specific to GO Bonds - ratio of how much of taxes are current vs how much of taxes are not current

Question 18

What gap is favorable when assessing GO Bonds?

Answer 18

Gap between assessed valuation and full estimated value

Question 19

What is a Feasability Study?

Answer 19

Specific to Revenue Bonds -

Question 20

What is a Trust Indenture?

Answer 20

Specific to Revenue Bonds - written covenant/promise between the issuer and the trustee FBO the bondholders

Question 21

Which expenses within the Flow of Funds hold priority?

Answer 21

Operations and Maintenance (assume NET revenue pledge)

Question 22

What is an Open End Bond?

Answer 22

A type of Revenue Bond - continuously issues as long as the bond meets qualification of the Additional Bonds Test

Question 23

What is a key factor within the Additional Bonds Test when assessing an Open End Bond?

Answer 23

Debt Service Coverage Ratio

Question 24

What is a Closed End Bond?

Answer 24

A type of Revenue Bond - only issues new bonds to make the facility operational

Question 25

... is considered insurance for the timely payment of interest and principal if an issuer defaults.

Answer 25

Credit Enhancement

Question 26

What does Credit Enhancement cover? What does it NOT cover?

Answer 26

Credit Enhancement covers the timely payment of interest and principal. It does NOT insure the Secondary Price

Question 27

GO Bonds: Limited Tax Bonds vs Unlimited Tax Bonds

Answer 27

Limited Tax Bond - only going to charge fixed number of taxes Unlimited Tax Bonds - we will charge whatever is necessary to pay back bonds (subject to fluctuations)

Question 28

What are Municipal Money Market Securities, and what kinds are there?

Answer 28

High Quality debt maturing in less than a year: TANs, GANs, TRANs, BANs, RANs

Question 29

Tax Anticipation Notes (TANs)

Answer 29

ST securities issued by Muni Bond issuers to finance projects when funds are not available - governments repay using tax revenue

Question 30

Grant Anticipation Notes (GANs)

Answer 30

ST securities issued by Muni Bond issuers to finance in anticipation of receiving a grant

Question 31

Tax and Revenue Anticipation Notes (TRANs)

Answer 31

A combination of TANs and RANs

Question 32

Bond Anticipation Notes (BANs)

Answer 32

ST securities issued by Muni Bond issuers in advance of a larger future bond issue

Question 33

Revenue Anticipation Notes (RANs)

Answer 33

ST securities issued by Muni Bond issuers that are repaid using revenue the project generates

Question 34

Special Tax Bonds

Answer 34

Taxed bonds on special items such as gas or alcohol

Question 35

Moral Obligation Bonds

Answer 35

The state is morally obligated to pay back the bond; Legislative Apportionment: where the members of the Legal Opinion take a vote on whether to pay back the bond

Question 36

Double Barreled Bonds

Answer 36

Consists of two promises: 1) User Fee, 2) Full faith and credit of the municipality

Question 36

What kind of risks that come with Municipal Bonds?

Answer 36

Call Risk comes with a declining interest rate environment. Municipalities are more likely to call (buy back) bonds in a declining interest rate environment.

Question 36

Industrial Development Bonds

Answer 36

Private Activity bonds that are taxable; two common types: Industrial Development Agency (IDA) and Industrial Development Revenue (IDR)

Question 36

Which kind of bonds are not subject to Call Risk?

Answer 36

Zero Coupon Bonds and US Treasury Bonds

Question 36

Call Protection

Answer 36

Two important factors: Time and Price

Question 37

What type of calls can be made by municipalities?

Answer 37

Partial calls (done by lottery or randomly)

Question 37

Sinking Funds

Answer 37

A fund that puts aside money that is needed to pay for a bond - usually has better credit quality than a bond without a sinking fund

Question 37

Catastrophe Call

Answer 37

May be contained in the Trust Indenture: Need not be disclosed. A call that is conducted under extreme situations (ie natural disaster)

Question 38

Call Provisions are advantageous to the issuer in a...

Answer 38

Declining interest rate environment

Question 39

Bonds without a Call Provision will be issued with a...

Answer 39

Higher Price (Premium) and Lower Yield

Question 40

Put or Tender Options for bonds are advantageous to the issuer in a...

Answer 40

Rising interest rate environment

Question 41

Prerefunding

Answer 41

Sell new bonds to call old bonds when they pass the [call] protection period

Question 42

Old bonds that have been prerefunded have to be quoted on a...

Answer 42

YTC basis

Question 43

UPC

Answer 43

Uniform Practice Code: Standardizes practices and secondary market (so that everyone agrees that everything will act the same way)

Question 44

Settlement for Municipal Bonds...

Answer 44

Trade Date (T) + 2

Question 45

The buyer of the Municipal Bond owes the seller...

Answer 45

The dollar amount of accrued interest calculated from dated date up to (but not including) settlement date

Question 46

Municipal Securities calendar consists of

Answer 46

30 days/month, 360 days/year (30/360)

Question 47

If you buy a Municipal Bond at a premium, you must do...

Answer 47

A straight amortization downward (decretion)

Question 48

True or False: Longer term Bonds are less volatile than Short term Bonds

Answer 48

False

Question 49

True or False: Lower coupon bonds are more volatile than Higher coupon bonds

Answer 49

True

Question 50

Tax Equivalent Yield/Tax-Free Equivalent

Answer 50

Taxable Yield * (100% - tax bracket) = Tax-Free Equivalent Tax-Free Equivalent/(100% - tax bracket) = Taxable Yield

Question 51

True or False: Capital gains on Municipal Bonds are taxable

Answer 51

True

Question 52

What is the only component of a Municipal Bond that is tax-free?

Answer 52

The coupon

Question 53

Current Yield

Answer 53

Pay / Cost = Current Yield Annual Interest / Current Market Price = Current Yield

Question 54

Basis Point

Answer 54

10 cents 0.50% = 50 bps or 50 basis points

Question 55

Bonds in default...

Answer 55

Trade Flat

Question 56

Suitability: What are the tax implications of Municipal Bonds?

Answer 56

If you are buying same-state residency bonds, you are local, state, and federally tax-exempt (triple tax free) If you are buying different-state residency bonds, you are only federally tax-exempt (need to pay local and state tax)