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Unit Questions > Unit 3: Municipal Securities > Flashcards

Unit 3: Municipal Securities Flashcards

1
Q

__________securities offer investors a relatively safe means of investing for tax-free income

A

Municipal

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2
Q

For municipal securities, yield is________ that that of corporate or government bonds

A

lower

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3
Q

For municipal securities, interest is not taxable by _____________

A

federal government

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4
Q

Two types of Municipal Issues

A

General Obligation & Revenue

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5
Q

General Obligation has a________ bid

A

competitive

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6
Q

Revenue Bonds have a__________ bid.

A

negotiated

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7
Q

7 Types of Revenue Bonds:

A

1) IDRs or IDBs (subject to AMT)
2) Lease Rental Bonds
3) Certificate of Participation (COPs)
4) Special Tax Bonds
5) Special Assessment Bonds (or Special District Bonds)
6) New Housing Authority Bonds (NHAs, PHAs, Section 8)
7) Moral Obligation Bonds

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8
Q

A state or local issued bond if revenues or tax collections backing the bond are not sufficient to pay the debt service.

A

Moral Obligation Bonds

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9
Q

Short term securities that generate funds for a municipality that expects other revenues soon.

A

Municipal Anticipation Notes

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10
Q

8 Types of Municipal Anticipation Notes

A

1) Tax Anticipation Notes (TANs)
2) Revenue Anticipation Notes (RANs)
3) Tax and Revenue Anticipation Notes (TRANs)
4) Bond Anticipation Notes (BANs)
5) Tax-exempt Commercial Paper
6) Construction Loan Notes (CLNs)
7) Variable Rate Demand Notes
8) Grant Anticipation Notes (GANs)

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11
Q

_________ bonds offer interest payments tied to the movements of another specified interest rate. The price of these bonds remains relatively stable. Aka reset bonds, their price remains near par at all times because their coupon is usually reset to the market rate of interest every six months.

A

Variable Rate Municipal Bonds

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12
Q

Variable Rate Municipal Bonds are also known as _____ bonds

A

reset

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13
Q

long term variable rate bonds tied to short term interest rates. Using a Dutch auction method.

A

Auction Rate Securities (ARS)

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14
Q

An ___________ is a document similar to a prospectus and is furnished in most cases to buyers of new issue municipal bonds. SEC Rules require that an __________ be prepared for most-but not all-new municipal issues. The MSRB has no such requirement, as it does not regulate issuers.

A

official statement;

official statement

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15
Q

A type of underwriting for revenue bonds; a municipality appoints an investment banker to underwrite the offering

A

Negotiated Underwriting

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16
Q

A type of underwriting bidding where a municipality publishes an invitation to bid; usually for GOs

A

Competitive Bidding

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17
Q

Published every business day and serves as an authoritative source of information on primary market muni bonds. Publishes a 30-day visual supply and the placement or acceptance ratio indexes of new issues sold vs total dollar value of new issues offered. (Compiles 40 Bond Index, 20 Bond Index, 11 Bond Index and Revdex 25)

A

Bond Buyer

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18
Q

The most up-to-the-minute information relevant to the secondary muni bond market.

A

Thomson Muni Market Monitor

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19
Q

An Eastern account underwriting of $100 million in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and sells out its allotment of $10 million. However, some of the other firms participating in the deal are not as successful, and $15 million of the bonds remain unsold. What is ALFA Securities’ financial obligation?

A

$1.5 million.

Undivided liability in an Eastern account means this member is liable for 10% of the unsold bonds (10% × $15 million = $1.5 million).

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20
Q

Order Allocation in a municipal underwriting

A

(Presale, Group, Designated Order, Member Order)

Pro Golfers Don’t Miss - PGDM

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21
Q

In a new municipal bond offering, which of the following orders is placed after the bid is awarded and credits the entire syndicate with the takedown?

A

A group order

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22
Q

A_______ order is entered before the bid is awarded. If the syndicate wins the bid, the takedown is credited to all syndicate members.

A

presale

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23
Q

A_______ order is entered after the bid is awarded and the takedown is credited to all syndicate members.

A

group

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24
Q

A________ order, entered after the bid is awarded, credits some but not all syndicate members with the takedown.

A

designated

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25
Q

A________ order, entered after the bid is awarded, credits only the syndicate member entering the order with the takedown.

A

member

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26
Q

Which type of municipal bonds are are rated according to a facility’s potential to generate sufficient money to cover operating expenses and principal and interest payments.

A

revenue bonds

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27
Q

Types of things considered for revenue bonds:

A

1) Economic justification
2) Competing facilities
3) Sources of revenue
4) Call provisions
5) Flow of funds

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28
Q

A _________ quote is one the dealer is prepared to buy or sell on, as opposed to a workable, nominal or subject quote

A

bona fide

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29
Q

A ________ quote must have a reasonable relationship to fair market value and can be made in consideration of any anticipated market movement.

A

bona fide

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30
Q

On the offer side of a ________ quote a dealer may make an offer to sell bonds that it does not hold in its own inventory but must know where to obtain the bonds if they are needed to complete the transaction.

A

bona fide

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31
Q

One should always remember that the tax-free interest paid by municipal bonds makes them better suited to those in______ tax brackets.

A

higher

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32
Q 
An outstanding municipal bond issue has the following characteristics: 7.50% coupon; maturity in 20 years; puttable in 5 years at 100; callable at 102 in 10 years; declining in a straight-line to maturity; yield-to-maturity is 6.50%. The issues should now be quoted:
A) yield-to-call at 102.
B) yield-to-call at par.
C) yield-to-maturity.
D) yield-to-put.
A

Since the bond issue is selling at a premium, the yield-to-call is less than the yield-to-maturity. The bonds must be quoted as yield-to-call at the earliest maturity, which would be the 10-year call at 102. If the bonds were selling at a discount, yield-to-maturity would be the proper quote. Yield-to-put is not required to be quoted.
Reference: 3.4.5.1 in the License Exam Manual

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33
Q

An________ who receives compensation based on sales must be registered as a sales representative.

A

employee

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34
Q 
Of the following callable bonds, which confirmation must show yield to call?
A) 6% municipal, basis 6.5%, due 2018.
B) 6% municipal, basis 5.5%, due 2018.
C) 6% municipal, basis 7%, due 2028.
D) 6% municipal, par, due 2028.
A

The only bond priced at a premium is 6% municipal, basis 5.5%, due 2018. On a premium bond, the yield to call will be lower than the yield to maturity.
Reference: 3.4.5.1 in the License Exam Manual

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35
Q

All of the following items of information must be included in a municipal securities confirmation EXCEPT:

A) the date of maturity that has been fixed by a call notice.
B) an extraordinary call provision.
C) the capacity in which the broker/dealer acted.
D) whether the securities are fully registered or book entry.

A

MSRB rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.
Reference: 3.4.5.1.2 in the License Exam Manual

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36
Q

________ is any material designed for use in the public media. Includes abstracts and summaries of the official statement; offering circulars; reports; market letters and form letters.

A

Advertising

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37
Q

an independent SRO; governs the issue and trade of municipal securities, but has no authority to enforce the rules it makes.

A

Municipal Securities Rulemaking Board (MSRB)

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38
Q

________ enforces MSRB rules

A

Federal Reserve Board (FRB)

39
Q

________enforces MSRB rules for non-national banks

A

Federal Deposit Insurance Corporation (FDIC)

40
Q

Quotes, dealers, and sales representatives are regulated by the_______; issuers are not.

A

MSRB

41
Q

$______ is the maximum political contribution allowed under MSRB rules for those eligible to vote in the municipality issuing debt on a negotiated basis.

A

$250

42
Q

On receipt of a customer complaint, the _____ _____ ______must accept the complaint, record the action taken, put it in a complaint file, and respond. Responses also become part of the complaint file.

A

municipal securities dealer

43
Q

Dealers participating in a________ account (either syndicate or secondary) are not allowed to distribute quotes relating to the securities in the account that indicate more than one market for the same securities.

A

joint

44
Q

The_________ of municipal debt is largely exempt from taxation, but not capital gains. Muni bond investors who buy low and sell high will have capital gains to report

A

interest

45
Q

Investors who purchase_______ bonds issued by the state in which they live often receive a special tax exemption; they may not be required to pay taxes on interest to the fed or state govt.

A

muni

46
Q

Municipalities generally pay________ interest rates than do corporate issuers.

A

lower

47
Q

In general, tax-free municipal securities are more appropriate for investors in ______ tax brackets and are not suitable for investors in______ tax brackets.

A

high;

low

48
Q

In the context of municipal securities, the term_________ refers to two or more taxing agencies that share the same geographic boundaries and are able to issue debt separately. Overlapping debt occurs when two or more issuers are taxing the same property to service their respective debt. Only occurs in property taxing situations. Because states do not generally tax real estate, state debt never overlaps.

A

coterminous

49
Q

_______ are the only municipal issues backed in full by the U.S. Government.

A

PHAs, NHAs, Section 8

50
Q

________taxes, or ad valorem taxes, are associated with GOs. Special taxes are used to back revenue bonds. Examples include hotel, tobacco, liquor, and gasoline taxes.

A

Property

51
Q

The Bond Buyer includes the _____-day visible supply index

A

30

52
Q

The ________ 30-Day Visible Supply includes issues of bonds sold on a competitive basis and issues of bonds sold on a negotiated basis. The Visible Supply includes only bonds. Notes are not considered, because they do not compete directly with the bonds.

A

Bond Buyer’s

53
Q

The ___________ provides the most up-to-the-minute information relevant to the secondary municipal bond market.

A

The Thomson Muni Market Monitor provides the most up-to-the-minute information relevant to the secondary municipal bond market.

54
Q

________ is a straight mathematical interest rate calculation. The lowest net interest cost is the winner.

A

NIC (net interest cost)

55
Q

Municipal spread questions are generally asked in terms of_______, not dollars. One bond______ equals $10.

A

points;

point

56
Q

Be ready for a question that asks you to rank parts of the spread in order of their size. Remember that the_______ fee is typically the smallest and the total takedown is the largest.

A

manager’s

57
Q

You may see a question that asks under what circumstances a syndicate member can receive the full spread when a bond is sold. The answer is that the syndicate member receives the full spread if the member is also the ________member.

A

syndicate

58
Q

Total takedown is the________ plus the additional takedown.

A

concession

59
Q

A question might ask about what is or is not included in the various categories on the debt statement. A good rule: for any category that uses the word ______, self supporting debt and sinking fund accumulations are not included. For instance, net total debt includes all GOs and overlapping debt but does not include the self-supporting and sinking fund accumulations.

A

net

60
Q

In a______ revenue pledge debt service is paid from the net revenues, meaning operations and maintenance costs are paid first. This is the more common of the two pledges.

A

net

61
Q

Memorizing the ratios is less important than understanding them. A question might ask if a ratio is used to analyze GOs or revenues. Associate all ratios with GOs except for _____ ______ ______ ratio, which analyzes revenues.

A

debt service coverage ratio

62
Q

A municipal revenue bond indenture contains a net revenue pledge. The following are reported for the year: $30 million of gross revenues, $18 million of operating expenses, $4 million of interest expense, and $2 million of principal repayment. Which is the debt service coverage ratio?

A. 2:1
B. 3:1
C. 5:1
D. 9:1

A

Answer: A. Under a new revenue pledge, bondholders are paid from net revenue, which equals gross revenue minus operating expenses. Net revenue is $12 million ($30 million - $18 million). Debt service is the combination of interest paid and principal repayment. The debt service is $6 million ($4 million + $2 million). To compute the debt service ration, divide net revenue by debt service: $12 million / $6 million = a ration of 2:1

63
Q

________ bonds should be delivered with evidence of insurance either on the certificate or in a separate document.

A

Insured

64
Q

If a question mentions a 6% bond quoted on a 6.5 basis, you should be able to determine that the coupon of the bond is 6% and its YTM is 6.5%. Because the YTM is higher than the coupon, the bond is trading at a________.

A

discount

65
Q

Particular care must be taken in a discretionary account. If a_______ relationship exists, no transaction is permitted without prior authorization from the customer.

A

control

66
Q

When answering a tax equivalent yield question, keep in mind that the______ yield will always be less than the corporate yield.

A

municipal

67
Q

Securities issued by state or local govt, U.S. territories, authorities and special districts.

A

Municipal Bonds

68
Q

________securities are considered second in safety of principal only to U.S. govt and U.S. govt agency securities. They are exempt from the filing requirements of the Act of 1933.

A

Municipal

69
Q

This doctrine states that a level of govt can tax only the interest of its own issues. Fed is taxed by fed govt. State and local govt is taxed at municipal level and U.S. territories are exempt from all three levels.

A

Doctrine of Reciprocal Immunity (Doctrine of Mutual Reciprocity)

70
Q

______bonds are term bonds quoted by price

A

dollar

71
Q

___________ bonds are known as full faith and credit issues; issued for capital improvements that benefit the entire community.

A

General Obligation Bonds (GOs)

72
Q

revenue bonds that have characteristics of GO bonds.

A

Double-Barreled Bonds

73
Q

______ bonds are used to finance any municipal facility that generates sufficient income. Not subject to statutory debt limits and do not require voter approval. May be subject to additional bonds test before issued:
Feasibility Study
Sources of Revenue

A

Revenue bonds

74
Q

Trust indenture or bond resolution is known as a ________ covenant

A

protective

75
Q

standard provisions in trust indenture

A

Bond Covenants

76
Q

This type of revenue bond is issued to construct facilities or purchase equipment which is then leased to a corporation. These bonds carry a corporate debt rating.

A

Industrial Development Revenue Bonds (IDRs or IDBs)

77
Q

Interest on these nonpublic purpose bonds (IDRs or IDBs) may be taxable because the Tax Reform Act of 1986 reserves tax exemption for public purposes. Because IDRs are for nonpublic purposes, the interest may be subject to an ____________.

A

AMT (Alternative Minimum Tax).

78
Q

These bonds are the only municipal issues backed in full by the U.S. government. They are also called Section 8 bonds.

A

PHAs (or NHAs)

79
Q

A municipal issuers enters into a bond_______ with the underwriters or its securities.

A

bond contract

80
Q

Contract between bond’s issuer and a trustee

A

Underlying trust indenture (aka protective covenant)

81
Q

Must be signed by an officer of the issuer. It is the municipal securities industry’s equivalent of the corporate prospectus.

A

Official statement

82
Q

This document discloses most of the same material information as the official statement, with the exception of the issue’s interest rates and offering price.

A

Preliminary Official Statement

83
Q

Issued as either qualified opinion (there may be a legal uncertainty) or an unqualified opinion (issued unconditionally)

A

Legal Opinion

84
Q

paid to the selling group

A

Concessions

85
Q

paid to syndicate members when bonds are sold through a selling group.

A

Additional Takedown

86
Q

The_______ ratio is specific to revenue bonds only and tells how many times annual revenue from that issue will cover the debt service of the issue.

A

coverage

87
Q

Which of the following is backed by the full faith and credit of the U.S. govt?

A

PHAs

88
Q

All of the following are used to provide debt services for revenue bonds, EXCEPT:
Excise taxes, business license taxes, ad valorem taxes, alcohol taxes

A

answer is ad valorem taxes, these are associated with GOs.

89
Q

If an indenture has a closed-end provision, this means that additional issues will have______ liens

A

junior

These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.
Reference: 3.1.2.2.4 in the License Exam Manual

90
Q

________in a municipal bond underwriting refers to yields by maturity.

A

Scale

Short maturity bonds usually yield less than do longer maturities. This scale of yields can be converted into dollar prices to allow underwriters to calculate a bid for an issue.
Reference: 3.2.5 in the License Exam Manual

91
Q

Who signs the agreement among underwriters for a municipal bond issue?

A

All members of the underwriting syndicate.

All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.
Reference: 3.2.4 in the License Exam Manual

92
Q

If a customer buys______ municipal bonds, MSRB rules state that the confirmation sent to the customer must disclose the: lower of either the yield to call or yield to maturity.

A

callable

MSRB Rule G-15 states that the confirmation must indicate the lowest possible yield.
Reference: 3.4.5.1 in the License Exam Manual

93
Q

A notice of_______ is published to provide syndicates with information on proposed new (primary market) issues.

A

sale

94
Q

The nature of any________ relationship or conflict of interest must be disclosed to customers. This includes both primary (new issue) and secondary transactions, whether the firm acts as agent or principal.

A

control

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