Municipal Securities cont' Flashcards
(24 cards)
the date from which interest accrual begins for new bond issues
the date from which interest accrual begins for new bond issues
When the trade takes place so that it settles on an interest payment date, there is no accrued interest because the seller will receive a check from the issuer for the interest. _ means no accrued interest is included in the transaction.
Trading flat
_ bonds trade flat because there is no interest being paid.
Zero coupon
- reduces cost basis
- reduces reported interest income
Straight-line amortization means that an equal amount of the premium will be amortized each year the bond is held. If held to maturity, there is no capital loss because the cost basis has been reduced to par.
If a municipal bond is purchased at a discount, _ is used to adjust the cost basis back up to par.
Accretion: increases cost basis, and increases reported interest income. At maturity, there is no reported capital gain. The accounting word for adjusting the cost basis of a discount bond upward is accretion, meaning “to add.”
nominal yield ÷ (1 − federal income tax rate)
formula for computing tax-equivalent yield
True or False) The tax-equivalent yield is always higher than the municipal coupon.
True
Never recommend municipal bonds to investors unless they are in the _ tax brackets.
higher tax brackets; Clients in a low tax bracket should never be offered a municipal bond as a suitable recommendation.
What happens to the appreciation or accretion of OID securities held to maturity?
It is treated as interest income
OID stands for Original Issue Discount securities.
How is interest income from municipal securities taxed?
It is tax free
This tax exemption applies to interest income from municipal securities.
What is the tax treatment of accretion when purchasing a municipal security in the secondary market at a discount?
It is taxed as ordinary income
Fill in the blank: The appreciation or accretion of OID securities held to maturity is treated as _______.
[interest income]
True or False: Interest income from municipal securities is subject to federal income tax.
False
When is the accretion on municipal securities taxed as ordinary income?
When purchased in the secondary market at a discount
The _ established the MSRB as an independent, self-regulatory organization (SRO).
Securities Acts Amendments of 1975
True or False) The MSRB rules apply to all firms and individuals engaged in the conduct of municipal securities business. The MSRB does not regulate issuers.
True
True or False) FINRA governs the issuance and trading of municipal securities
FALSE: The MSRB governs the issuance and trading of municipal securities
What happens to interest rates if the visible supply of bonds is exceptionally large?
Interest rates are likely to rise to attract investors
This is because a larger number of bonds available in the market increases competition among issuers.
What does a small visible supply of bonds indicate about interest rates?
Interest rates are likely to fall
A small supply suggests less competition for investment, which can lead to lower rates.
What does a high placement ratio indicate about the market for municipal bonds?
The market for municipal bonds is strong
A high placement ratio means that a larger proportion of bonds issued are successfully sold.
What is indicated by a low placement ratio in the municipal bond market?
Dealers will likely exhibit concern about bidding on new issues
A low placement ratio suggests weaker demand or issues with the bonds being offered.
What is the relationship between CR, CY, and YTM for premium bonds?
CR > CY > YTM
What is the relationship between CR, CY, and YTM for par bonds?
CR = CY = YTM
What is the relationship between CR, CY, and YTM for discount bonds?
CR < CY < YTM
