Unit 3: Municipal Securities

Question 1

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

Answer 1

Municipal

Question 2

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

Answer 2

lower

Question 3

For municipal securities, interest is not taxable by _____________

Answer 3

federal government

Question 4

Two types of Municipal Issues

Answer 4

General Obligation & Revenue

Question 5

General Obligation has a________ bid

Answer 5

competitive

Question 6

Revenue Bonds have a__________ bid.

Answer 6

negotiated

Question 7

7 Types of Revenue Bonds:

Answer 7

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

Question 8

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

Answer 8

Moral Obligation Bonds

Question 9

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

Answer 9

Municipal Anticipation Notes

Question 10

8 Types of Municipal Anticipation Notes

Answer 10

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)

Question 11

_________ 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.

Answer 11

Variable Rate Municipal Bonds

Question 12

Variable Rate Municipal Bonds are also known as _____ bonds

Answer 12

reset

Question 13

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

Answer 13

Auction Rate Securities (ARS)

Question 14

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.

Answer 14

official statement;

official statement

Question 15

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

Answer 15

Negotiated Underwriting

Question 16

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

Answer 16

Competitive Bidding

Question 17

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)

Answer 17

Bond Buyer

Question 18

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

Answer 18

Thomson Muni Market Monitor

Question 19

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?

Answer 19

$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).

Question 20

Order Allocation in a municipal underwriting

Answer 20

(Presale, Group, Designated Order, Member Order)

Pro Golfers Don’t Miss - PGDM

Question 21

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?

Answer 21

A group order

Question 22

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

Answer 22

presale

Question 23

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

Answer 23

group

Question 24

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

Answer 24

designated

Question 25

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

Answer 25

member

Question 26

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.

Answer 26

revenue bonds

Question 27

Types of things considered for revenue bonds:

Answer 27

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

Question 28

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

Answer 28

bona fide

Question 29

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

Answer 29

bona fide

Question 30

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.

Answer 30

bona fide

Question 31

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

Answer 31

higher

Question 32

``` 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. ```

Answer 32

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

Question 33

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

Answer 33

employee

Question 34

``` 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. ```

Answer 34

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

Question 35

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.

Answer 35

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

Question 36

________ 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.

Answer 36

Advertising

Question 37

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

Answer 37

Municipal Securities Rulemaking Board (MSRB)

Question 38

________ enforces MSRB rules

Answer 38

Federal Reserve Board (FRB)

Question 39

________enforces MSRB rules for non-national banks

Answer 39

Federal Deposit Insurance Corporation (FDIC)

Question 40

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

Answer 40

MSRB

Question 41

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

Answer 41

$250

Question 42

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.

Answer 42

municipal securities dealer

Question 43

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.

Answer 43

joint

Question 44

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

Answer 44

interest

Question 45

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.

Answer 45

muni

Question 46

Municipalities generally pay________ interest rates than do corporate issuers.

Answer 46

lower

Question 47

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

Answer 47

high; | low

Question 48

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.

Answer 48

coterminous

Question 49

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

Answer 49

PHAs, NHAs, Section 8

Question 50

________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.

Answer 50

Property

Question 51

The Bond Buyer includes the _____-day visible supply index

Answer 51

30

Question 52

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.

Answer 52

Bond Buyer's

Question 53

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

Answer 53

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

Question 54

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

Answer 54

NIC (net interest cost)

Question 55

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

Answer 55

points; | point

Question 56

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.

Answer 56

manager’s

Question 57

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.

Answer 57

syndicate

Question 58

Total takedown is the________ plus the additional takedown.

Answer 58

concession

Question 59

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.

Answer 59

net

Question 60

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.

Answer 60

net

Question 61

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.

Answer 61

debt service coverage ratio

Question 62

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

Answer 62

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

Question 63

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

Answer 63

Insured

Question 64

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________.

Answer 64

discount

Question 65

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

Answer 65

control

Question 66

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

Answer 66

municipal

Question 67

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

Answer 67

Municipal Bonds

Question 68

________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.

Answer 68

Municipal

Question 69

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.

Answer 69

Doctrine of Reciprocal Immunity (Doctrine of Mutual Reciprocity)

Question 70

______bonds are term bonds quoted by price

Answer 70

dollar

Question 71

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

Answer 71

General Obligation Bonds (GOs)

Question 72

revenue bonds that have characteristics of GO bonds.

Answer 72

Double-Barreled Bonds

Question 73

______ 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

Answer 73

Revenue bonds

Question 74

Trust indenture or bond resolution is known as a ________ covenant

Answer 74

protective

Question 75

standard provisions in trust indenture

Answer 75

Bond Covenants

Question 76

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.

Answer 76

Industrial Development Revenue Bonds (IDRs or IDBs)

Question 77

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 ____________.

Answer 77

AMT (Alternative Minimum Tax).

Question 78

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

Answer 78

PHAs (or NHAs)

Question 79

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

Answer 79

bond contract

Question 80

Contract between bond’s issuer and a trustee

Answer 80

Underlying trust indenture (aka protective covenant)

Question 81

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

Answer 81

Official statement

Question 82

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.

Answer 82

Preliminary Official Statement

Question 83

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

Answer 83

Legal Opinion

Question 84

paid to the selling group

Answer 84

Concessions

Question 85

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

Answer 85

Additional Takedown

Question 86

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.

Answer 86

coverage

Question 87

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

Answer 87

PHAs

Question 88

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

Answer 88

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

Question 89

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

Answer 89

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

Question 90

________in a municipal bond underwriting refers to yields by maturity.

Answer 90

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

Question 91

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

Answer 91

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

Question 92

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.

Answer 92

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

Question 93

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

Answer 93

sale

Question 94

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.

Answer 94

control