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Flashcards in Municipal Underwritings Deck (35)
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1
Q

All of the following statements are true regarding the municipal financial advisor in competitive bid underwritings EXCEPT:

A. the financial advisor helps the issuer structure a new bond offering
B. the issuer pays the financial advisor
C. the financial advisor is prohibited from bidding on the issue
D. Due to the tax implications, the financial advisor is usually a CPA firm

A

The best answer is D.

Financial advisors to municipalities are municipal broker-dealers familiar with the municipal marketplace. The financial advisor helps a municipality structure a competitive bid offering, receiving a fee from the municipality for this service.

The firm that acts as the advisor attempts to get the lowest interest cost for the issuer. If the same firm were to be the underwriter, there is an inherent conflict of interest. As the underwriter, the firm wants to get the highest interest rate from the issuer, which makes the issuer easier to sell.

The firm that acts as the financial adviser cannot be the underwriter in the deal - and this is true for both competitive bid and negotiated offerings. Financial advisors are municipal broker-dealers - not CPA firms.

2
Q

On a new issue of municipal bonds, the bond counsel will evaluate all of the following documents EXCEPT:

A. Enabling Legislation
B. Feasibility Study
C. Internal Revenue Regulations
D. Relevant Judicial Decisions

A

The best answer is B.

The bond counsel examines new municipal issues to render an opinion on the validity, legality, and tax exempt status of the issue. To make its determination, the counsel will examine enabling legislation, relevant judicial decisions, and Internal Revenue Service rulings.

The bond counsel does not examine the Feasibility Study. This is an economic forecast for the project, comparing projected revenues against projected costs. Bond attorneys make legal evaluations, not economic ones!

3
Q

The bond counsel for a new municipal issue will opine on all of the following EXCEPT:

A. compliance of the issuer with Treasury arbitrage regulations
B. fairness and reasonableness of the reoffering yields
C. legal validity of the issue as a binding obligation on the issuer
D. Federal and Local tax status of the interest income to be received by holders of the issue

A

The best answer is B.

Municipal bond counsels give an opinion on the validity, legality and tax exempt status of a new municipal issue. The do not give an opinion of the fairness of the yield on that issue (remember, lawyers do not give economic opinions).

4
Q

Which statement is TRUE regarding new municipal offerings?

A. Highway bonds are typically offered through competitive bids
B. Political subdivision municipal bond issues are usually offered through competitive bids
C. County bonds are usually offered through negotiated underwritings
D. School District bonds are usually offered through negotiated underwritings

A

The best answer is B.

Most general obligation issues are sold through competitive bid while revenue bond issues are typically sold through negotiated offerings. Political subdivision issues are general obligation bonds of cities, counties, and townships and school districts. Enterprise activity issues are revenue bond issues where revenues from an enterprise pay for the debt service on the issue such as highways and airport bonds.

5
Q

Which statement is TRUE regarding new municipal offerings?

A. Bridge Authority municipal bond issues are usually offered through competitive bids
B. G.O. issues are usually offered through competitive bids
C. School district municipal bond issues are usually offered through negotiated underwritings
D. Turnpike Authority bond issues are usually offered through competitive bids

A

The best answer is B.

Most general obligation issues are sold through competitive bid while revenue bond issues are typically sold through negotiated offerings. School district bond issues are general obligation bonds. Authority bond issues, such as a turnpike authority or a bridge authority, are revenue bonds.

6
Q

A municipality will solicit bids from interested persons for a new bond issue by publishing a(n):

A. Official Statement
B. Prospectus
C. Official Notice of Sale
D. Tombstone

A

The best answer is C.

Municipalities publish an “Official Notice of Sale” that gives the details of a new bond issue that the municipality will put up for auction in the near future. This is published in the Bond Buyer, and often in local newspapers as well.

Any interested potential bidders can contact the municipality for more detailed information by requesting a copy of the “Preliminary Official Statement” - the disclosure document for municipal new issues.

There is no prospectus requirement for municipal issues because these are exempt securities (exempt from the provisions of the Securities Acts). Hence, the tombstone advertisement rules under the ‘33 Act do not apply to municipals, as well.

7
Q

In order to solicit competitive bids for a new bond issue, the municipality will:

A. invite selected local investment banks and commercial banks to bid on the issue
B. publish an Official Notice of Sale in the Bond Buyer
C. hire a municipal financial advisor to find an appropriate underwriter
D. publish an Offering Notice in Bloomberg

A

The best answer is B.

Municipalities publish an “Official Notice of Sale” that gives the details of a new bond issue that the municipality will put up for auction in the near future. This is published in the Bond Buyer, and often in local newspapers as well.

Any interested potential bidders can contact the municipality for more detailed information by requesting a copy of the “Preliminary Official Statement” - the disclosure document for municipal new issues.

8
Q

Which of the following information would NOT be found in the Official Notice of Sale?

A. par value of the bonds
B. reoffering yield of the bonds
C. maturities of the bonds
D. income source backing the bonds

A

The best answer is B.

The Official Notice of Sale gives the basic information needed to bid on a new bond offering. Included is the type of bond, dollar amount of each maturity, the names of the bond counsel and authorized person to conduct the bond sale at the township, among numerous other items such as the dated date of the issue (the date from which interest will start accruing) and the award date - the date that the winning bid will be announced.

What is not known is the interest rate and the reoffering yield on the bond. Both of these are determined by the winning bidder. The lowest interest rate bid wins - and this interest rate is printed on the bonds when they are delivered to the winning bidder. When the bonds are delivered to the winning bidder, the price is “marked-up” to give the underwriter a profit upon reselling the bonds to the public. When the price is “marked-up,” the reoffering yield on the bonds drops below the stated interest rate on the bonds.

9
Q

All of the following information would be found in the Official Notice of Sale EXCEPT:

A. Bond Type
B. Bond Maturities
C. Bond Interest Rates
D. Bond Attorney Name

A

The best answer is C.

The Official Notice of Sale gives the basic information needed to bid on a new bond offering. Included is the type of bond, dollar amount of each maturity, the names of the bond counsel and authorized person to conduct the bond sale at the township, among numerous other items such as the dated date of the issue (the date from which interest will start accruing) and the award date - the date that the winning bid will be announced.

What is not known is the interest rate on the bonds - this is determined by the winning bidder. The lowest interest rate bid wins - and this interest rate is printed on the bonds when they are delivered to the winning bidder.

10
Q

What is NOT a determining factor when making a competitive bid for a new municipal issue?

A. Type of income source backing the bonds
B. Yields of similar bonds in the market
C. Maturities of the bonds
D. Par value of the bonds

A

The best answer is D.

When making a bid for an issue, municipal underwriters would consider the maturities of the bonds; current yields of similar bonds in the market; and the type of bonds being offered (e.g., are they G.O., revenue, special tax, etc.) The par value of the bonds has no bearing on the interest rates to be bid.

11
Q

Which of the following is NOT a determining factor when making a competitive bid for municipal issues?

A. Maturities of the bonds
B. Yields in the market
C. Type of bonds
D. Amount of good faith check

A

The best answer is D.

When making a bid for an issue, municipal underwriters would consider the maturities of the bonds; current yields in the market; and the type of bonds being offered. The amount of the good faith check has no bearing on the bid. (Remember that in a competitive bid underwriting, the underwriter bids in terms of interest rate, with the lowest interest rates winning the bid. This is the lowest net interest cost to the issue

12
Q

All of the following are reasons why the good faith check may be returned EXCEPT the:

A. issuer rejects all bids
B. check is improperly prepared
C. underwriter loses the bid
D. underwriter wins the bid

A

The best answer is D.

If the underwriter wins the bid, the issuer keeps the good faith check and applies it to the balance due, once the bonds are printed and ready for delivery. The check will be returned if it is improperly prepared or if the bid is rejected.

13
Q

The Bid Form submitted to the issuer in a competitive bid municipal bond underwriting is best described as a(n):

A. completed requisition for new bonds
B. executed contract between issuer and bidder
C. uncompleted contract to buy bonds
D. tender offer for the bonds

A

The best answer is C.

The bid form really is an uncompleted contract to buy the bonds. The bidder signs the form when the bid is submitted. If the bid is won, the issuer’s representative signs the form accepting the bid at the stated terms and deposits the good faith check. This is the completed contract to buy the bonds.

14
Q

The contract between an issuer and a bidder to buy a municipal issue is called the:

A. Bond Buyer Worksheet
B. Official Statement
C. Bid Form
D. Trust Indenture

A

The best answer is C.

The bid form really is an uncompleted contract to buy the bonds. The bidder signs the form when the bid is submitted. If the bid is won, the issuer’s representative signs the form accepting the bid at the stated terms and deposits the good faith check. This is the completed contract to buy the bonds.

15
Q

All of the following are included in a competitive bid EXCEPT:

A. reoffering yields
B. stated rates of interest
C. premiums or discounts
D. dollar amount of bid

A

The best answer is A.

The reoffering yields are not in the syndicate bid - the interest rates to be printed on the bonds are in the bid. Also included are any premiums or discounts from par specified in the bid; the total dollar amount being bid; and the Net Interest Cost (if it is an NIC - Net Interest Cost bid) or the True Interest Cost (if it is a TIC - True Interest Cost bid).

16
Q

All of the following are included in a competitive bid EXCEPT:

A. stated rates of interest
B. premium over par if specified by bidder
C. discount below par if specified by bidder
D. names of the customers who will purchase the bonds from the underwriters

A

The best answer is D.

The interest rates to be printed on the bonds are in the bid. Also included are any premiums or discounts from par specified in the bid. A premium over par will reduce the Net Interest Cost (NIC) to the issuer; while a discount from par increases the Net Interest Cost to the issuer. The names of the customers who will buy the bonds from the underwriters is not in the bid; nor should it be of any interest to the issuer.

17
Q

The Agreement Among Underwriters is also known as the:

A. Due Diligence Agreement
B. Syndicate Agreement
C. Selling Group Agreement
D. Partnership Agreement

A

The best answer is B.

The agreement among underwriters is also known as the syndicate agreement. It establishes the syndicate account as either an Eastern or Western account and sets the terms for the running of the syndicate. It is signed by each syndicate member.

18
Q

If sales of a municipal new issue by a syndicate member are used to extinguish liability solely of that member, then this indicates the account is a(n):

A. Undivided account
B. Seperated account
C. Western account
D. Eastern account

A

The best answer is C.

A Western syndicate account is a fully divided account. It is divided as to selling responsibility; and it is divided as to liability.

19
Q

A divided municipal syndicate sells $4,000,000 of bonds out of a $4,500,000 offering. When the manager disbands the syndicate, the unsold bonds will be:

A. returned to the issuer
B. confirmed to each syndicate member that did not sell its allotment
C. confirmed to all syndicate members on a pro-rata basis
D. retained by the manager for distribution through a joint account

A

The best answer is B.

In a divided (Western) syndicate, each member takes a preset dollar amount of the issue. If any one syndicate member undersells, he is responsible for his unsold amount. For example, if a syndicate member takes $500,000 out of a $5,000,000 underwriting and only sells $400,000, the member is responsible for the other $100,000.

20
Q

A syndicate member in a Western account takes $3,000,000 out of a $15,000,000 underwriting. At the termination of the syndicate, $4,000,000 of the issue remains unsold while the member sold $2,200,000. This syndicate member’s remaining liability is:

A. $300,000
B. $800,000
C. $1,000,000
D. $1,800,000

A

The best answer is B.

A Western syndicate account is divided as to selling responsibility and divided as to liability. The member is only responsible for what the member was supposed to sell. The member is initially responsible for $3,000,000 - since the member sold $2,200,000, the member is only responsible for $800,000 of the $4,000,000 that remains unsold.

21
Q

A municipal syndicate member takes a 10% participation in a $2,500,000 underwriting in a Western Account. At the termination of the offering, this member sold its entire participation, but $250,000 of bonds remains unsold in the syndicate account. The member’s remaining liability is:

A. 0
B. $25,000
C. $225,000
D. $250,000

A

The best answer is A.

A Western Syndicate is divided as to selling responsibility and liability. This member took 10% of a $2,500,000 underwriting for a $250,000 commitment. Since this member sold its entire $250,000 commitment, it has no remaining liability.

22
Q

A undivided syndicate is known as a(n):

A. Eastern Syndicate
B. Western Syndicate
C. Northern Syndicate
D. Southern Syndicate

A

The best answer is A.

An undivided syndicate is known as an Eastern syndicate. In an Eastern account, the member gets credit for all bonds sold; but agrees to share liability for all unsold bonds pro-rata with the other syndicate members.

This contrasts to a Western account (divided syndicate) where each member is only liable for a pre-set dollar amount; and this dollar amount is the maximum that he or she can sell as a syndicate member.

There is no such thing as a Northern or Southern syndicate.

23
Q

A broker-dealer takes a 15% participation in a $10,000,000 Eastern syndicate account. At the termination of the offering, $2,000,000 of the issue remains unsold. The broker-dealer sold $1,000,000. The firm’s remaining liability is:

A. 0
B. $150,000
C. $300,000
D. $500,000

A

The best answer is C.

An Eastern syndicate is “undivided” - so that each syndicate member’s gain or loss is based on the performance of the total syndicate account - not on the performance of that syndicate member. This syndicate member’s share of profit and loss in the account is 15%. Since $2,000,000 of securities remains unsold out of the total account, the syndicate member is responsible for 15% of $2,000,000 = $300,000.

24
Q

A broker-dealer takes a 20% participation in a $20,000,000 Eastern syndicate account. At the termination of the offering, $4,000,000 of the issue remains unsold. The broker-dealer sold $4,000,000. The firm’s remaining liability is:

A. 0
B. $800,000
C. $1,600,000
D. $8,000,000

A

The best answer is B.

An Eastern syndicate is “undivided” - so that each syndicate member’s gain or loss is based on the performance of the total syndicate account - not on the performance of that syndicate member. This syndicate member’s share of profit and loss in the account is 20%. Since $4,000,000 of securities remains unsold out of the total account, the syndicate member is responsible for 20% of $4,000,000 = $800,000.

25
Q

The normal priority for handling municipal new issue orders is:

A. Pre-Sale, Designated, Member, Group
B. Group, Pre-Sale, Member, Designated
C. Pre-Sale, Group, Designated, Member
D. Designated, Group, Pre-Sale, Member

A

The best answer is C.

The normal priority for handling municipal new issue orders is: Pre-Sale Net, Group Net, Designated Net, Member Takedown. An easy way to remember this normal priority of orders is “Pro Golfers Don’t Miss!”

26
Q

New issue municipal “group” orders are filled:

A. before all other orders
B. after all other orders
C. after pre-sale orders, but before designated orders
D. after member orders, but before pre-sale orders

A

The best answer is C.

A municipal “group” order is placed by a syndicate member for the benefit of the group account. This order has priority after pre-sale orders. Following municipal group orders, the manager fills “designated” orders, which designate that the profit goes to a designated syndicate member, who can pass along part or all of that profit to the customer who placed the order as a discount. Finally, member orders at the takedown are filled.

27
Q

A syndicate member wishes to place an order with the manager for a new issue of a municipal bond underwriting. The bonds are to be purchased for the member’s own portfolio. Under MSRB rules, the order is filled:

A. first
B. after Pre-Sale orders, but before Designated orders
C. after Group Net orders, but before Member orders
D. last

A

The best answer is D.

Under MSRB rules, such orders (for the member’s own account) are to be accorded last priority by the manager when filling orders. (The normal priority is “PGDM” - Pre-Sale; followed by Group Net; followed by Designated; followed by Member Takedown orders).

28
Q

The Official Statement published for a new municipal issue:

A. is a disclosure document for use by potential investors
B. is a source document for selecting underwriters to be included in the syndicate
C. establishes the procedures for calculating reoffering scales
D. solicits bids from interested underwriters

A

The best answer is A.

The Official Statement provides disclosure about a new municipal issue to investors. It is requested by underwriters in order to perform due diligence on the issue, and to help sell the issue by having a disclosure document available for potential customers. It is not required under the Securities Act of 1933 since municipals are exempt.

29
Q

Under MSRB rules, which of the following documents, if prepared, must be sent to the purchaser of a new issue municipal bond?

A. Tombstone
B. Official Statement
C. Official Notice of Sale
D. Legal Opinion

A

The best answer is B.

The MSRB requires that all purchasers of new issue municipal bonds receive a Final Official Statement, if one has been prepared. If the Final is not going to be prepared, but a Preliminary Official Statement is available, then this document must be sent. This document must be given to the customer no later than settlement of the transaction.

(The rather “odd” wording that the “Official Statement, if prepared, must be delivered to customers” stems from the fact that the MSRB has no regulatory authority over municipal issuers and cannot require that municipal issuers prepare Official Statements. So instead, this is done through the “back door.” The SEC wrote a rule stating that an underwriter cannot buy a new municipal issue unless it obtains a copy of the Official Statement (OS) and performs due diligence on it (so the OS will be prepared). And since the OS will be prepared, it will be delivered to each customer under the MSRB rule. You gotta love lawyers at work!)

30
Q

In a competitive bid municipal underwriting, which statement is TRUE?

A. The spread must be disclosed
B. Each underwriter’s name must be disclosed
C. Each underwriter’s participation must be disclosed
D. The reoffering yield must be disclosed

A

The best answer is D.

In competitive bid municipal underwritings, the spread is not required to be disclosed, since it would be quite narrow. Only the reoffering yield and resultant dollar price is disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts.

31
Q

In a negotiated municipal underwriting, which statement is TRUE?

A. The spread does not have to be disclosed
B. The offering price of each maturity must be disclosed
C. The syndicate participation amounts must be disclosed
D. The name of each underwriter must be disclosed

A

The best answer is B.

In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters or their participation amounts.

32
Q

The syndicate manager decides to decrease the reoffering yield on a competitively bid new issue by 25 basis points. This action:

A. is prohibited under MSRB rules
B. will decrease the dollar price per bond paid by customers
C. will increase the dollar price per bond paid by customers
D. will not affect the dollar price per bond paid by customers

A

The best answer is C.

In a competitive bid new issue, the manager sets the reoffering yield lower than the interest rate printed on the bonds. Thus, the syndicate will have a profit on the issue, since it buys the bonds at par at the stated interest rates; and reoffers them a lower yields to the public (with the price to the public being at a premium to par). The reoffering yield is not cast in stone - if market interest rates fall, the manager can drop the reoffering yields to match the market. This will further increase the price of the bonds to the public (and increase the profit to the syndicate as well).

33
Q

A municipal bond dealer gives a quote on a new issue 20 year, 5% General Obligation bond. The quote includes a 20 basis point mark-up. Because of the mark-up, which statement is TRUE?

A. The dollar price of the bond will increase; the yield on the bond will decrease
B. The dollar price of the bond will decrease; the yield on the bond will increase
C. Both the dollar price and the yield on the bond will increase
D. Both the dollar price and the yield on the bond will be unaffected

A

The best answer is A.

Any “mark-up” of a new issue purchased by a dealer at a net offering price less a concession, is defined by the MSRB as any remuneration in addition to the concession received by the dealer as a result of increasing the offering price on the securities. If the offering price is increased, the yield on the bond must decline.

The terminology used in the question might appear to be a little confusing at first, since this dealer took a “20 basis point mark-up,” and basis points usually refer to yield movements. Thus, one might assume that the 20 basis point mark-up means that the dealer is increasing the yield and reducing the price. This is not the case. New issue municipal terminology works as follows:

Assume that the original offering basis on the bonds was 5.20%. Then, the market changed, and the bonds are “raised in price” by .20 (“marked-up”). The new price is now 5.00%. Thus, the basis is decreased and the price is raised.

34
Q

All of the following statements are true about new issue municipal selling practices EXCEPT:

A. the customer must receive a confirmation showing the purchase price
B. the customer must receive a copy of the Final Official Statement if one is printed
C. the customer must receive a copy of the Agreement Among Underwriters
D. if requested, the customer must receive the order priority provisions used by the manager

A

The best answer is C.

Under MSRB rules, a customer buying a new issue must receive a confirmation accompanied by a copy of the final Official Statement if one has been prepared. (If one has not been prepared by the issuer, there is no requirement to provide the document.)

If the customer requests, the order priority provisions must also be disclosed (Pre-Sale, Group, Designated, Member).

There is no requirement to send the customer a copy of the Agreement Among Underwriters - there really is no information of interest to customers in this document.

35
Q

Which of the following items is NOT associated with a competitive bid offering of General Obligation bonds?

A. Official Statement
B. Legal Opinion
C. Official Notice of Sale
D. Red Herring

A

The best answer is D.

In a competitive bid offering of municipal bonds, the issuer solicits bids on the issue by placing an Official Notice of Sale in the Daily Bond Buyer. Once the bid is awarded, the bonds are “printed” with the winning interest rates and delivered to the winner, who pays the issuer for the securities. The securities are then reoffered by the winning syndicate.

New issue disclosure on municipal bonds is given through the Official Statement; there is no prospectus requirement ( a Red Herring is a preliminary prospectus) since these issues are exempt from the Securities Act of 1933.

Any new long term municipal issue cannot be offered unless there is a legal opinion given on that security. The legal opinion is rendered by the Bond Counsel who examines the validity of the issue, its legality, and tax exempt status.