Unit 5 | Muni Securities Flashcards
(34 cards)
Are the following bonds trading at a premium or a discount?
1. 7% bond, 6.25% basis
2. 7% bond, 7.64% basis
3. 5% bond, 4.85% basis
4. 6% bond, 6.45% basis
- Premium; 2. Discount; 3. Premium; 4. Discount
All of the following statements are generally true about dollar bonds, except
A. they are term bonds.
B. they are serial bonds.
C. they have a sinking fund provision.
D. they are quoted as a percentage of par.
B. Dollar bonds are quoted as a percentage of par, which means in dollars and cents (hence the reason for their name). These are invariably term bonds because we quote serial bonds on a yield basis. With the principal payout due in a lump sum at the end of the term, the municipality usually adds a sinking fund to provide for the ultimate payoff.
The bond counsel’s services in providing the legal opinion associated with a new issue of municipal bonds is the responsibility of
A. the issuer.
B. the underwriter.
C. the investor.
D. the MSRB.
A. When a municipal bond is issued, the issuer hires bond attorneys, also known as bond counsel, to assist with the process. The underwriters involved in the issue may also hire their own bond counsel, but they are not responsible for providing the legal opinion. It is the role of the issuer’s bond counsel to provide the necessary legal opinion for the new municipal bond issue.
An investor receiving a quote of 102 for municipal security is probably interested in
A. a term bond.
B. a serial bond.
C. a bond anticipation note.
D. a general obligation bond.
A. When it comes to bond quotes, a quote of 102 is often referred to as a dollar quote rather than a yield quote. This means that instead of quoting the bond’s yield percentage, we express the bond’s price in dollars. For example, a bond with a dollar quote 102 would be priced at $1,020 for a $1,000 bond face value.
It’s worth noting that the most common type of dollar bonds are those with a term maturity, meaning they have a set date when the principal amount will be repaid. On the other hand, bonds without a specific maturity date, such as perpetual bonds or bonds with call options, are less likely to be quoted on a dollar basis and are instead quoted on a yield basis.
However, it’s essential to remember that while dollar quotes are common for some bonds, other bond quotes are typically expressed on a yield basis rather than a price basis. This means that instead of quoting the bond’s price in dollars, we express the bond’s yield percentage.
LO 5.a
Municipal bonds—known as dollar bonds—are generally quoted
A. as a percentage of par.
B. yield to call.
C. net yield.
D. yield to maturity.
A. Municipal bonds are typically quoted on a yield basis, but actively traded bonds, called dollar bonds, are often quoted as a percentage of the bond’s face value, or par value. The term dollar bond comes from the fact that the quote is made in dollars. It’s important to remember that a percentage of the bond’s par value, which is usually $1,000, equals a dollar price. LO 5.a
An investor purchases a new issue municipal bond. A copy of the official statement (OS)
A. must precede the delivery of the bonds.
B. need be delivered only if requested in writing by the investor.
C. need not be delivered because an OS is not a prospectus.
D. must accompany or precede the delivery of the bonds.
D. The OS is the municipal industry’s disclosure document. It is most similar to the prospectus used in corporate underwritings. MSRB rules require that a copy of the OS must accompany or precede the delivery of the bonds.
An abstract of a municipal securities issue official statement must be maintained on file for how long?
A. There is no requirement to file abstracts of official statements.
B. It must remain on file for 12 months.
C. It must remain on file for five years.
D. It must remain on file for four years.
D. The Municipal Securities Rulemaking Board (MSRB) mandates firms to keep official statements and abstracts for four years, just like all other documents intended for public communication. LO 5.b
All of the following statements regarding municipal advertising are true except
A. a principal must approve it.
B. copies must be sent to the Municipal Securities Rulemaking Board (MSRB).
C. copies must be kept for four years.
D. it must not be misleading.
B. Before their first use, all municipal advertisements must be approved in writing by the appropriate principal and kept on file for four years. Since the MSRB has no enforcement power, it is unnecessary to file the advertisement with them. LO 5.b
When the issuer of an insured municipal bond defaults, what does the insurance company do?
A. Both principal and interest are returned over the remaining bond term.
B. The principal is returned immediately, and the interest is paid based on the regular schedule.
C. Only the principal is returned, with the bondholder losing the interest.
D. Both principal and remaining interest payments are paid immediately to the bondholder.
A. Both interest and principal will be paid as scheduled overtime throughout the bond’s life. The insurance company does not pay it out as a lump sum. An investor won’t notice the difference because the interest checks will come the same way they always did.
You sell a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield must be stated as the yield to
A. maturity or yield to call, whichever is lower.
B. maturity.
C. maturity or yield to call, whichever is higher.
D. call.
D. According to the rules set by the Municipal Securities Rulemaking Board, it is mandatory to reflect the yield to call fixed by a pre-refunding on the confirmation statement. If an issuer has begun a pre-refunding, it has already fixed a call date for a bond issue, and the yield to call must be specified on the confirmation statement.
When a bond issue has been pre-refunded, the issuer has already set aside funds to pay off the debt before its maturity date. In such cases, the issuer will call the bond issue at the pre-determined call date, and there is no uncertainty surrounding this event. Thus, it is appropriate to price the bond to the call date, as the old maturity on the bond holds no further significance.
It is important to note that the pre-refunding of a bond issue can significantly impact its pricing and yield. Therefore, investors and market participants must carefully consider the terms and conditions of the pre-refunded bond issue before investing or trading in it. LO 5.e
The function of a broker’s broker in the municipal bond business is to do which of the following?
I. Help sell municipal bonds that a syndicate has been unable to sell
II. Protect the identity of the firm on whose behalf the broker’s broker is acting
III. Help prepare bids for an underwriting syndicate
IV. Serve as a wholesaler, offering bonds at a discount from the current bid and offer
A. Ill and IV
B. land IV
C. Il and III
D. land II
D. A broker’s broker is a type of intermediary that assists in selling the bonds that a syndicate has left over. They act on behalf of a firm, but they do not disclose the identity of the firm they are representing. Broker’s brokers do not charge fees for quoting securities, they do not hold an inventory, and they act solely as agents who earn a commission for their services. LO 5.e
While working in your office, you see that your firm will be holding a training session on municipal fund securities. You wish to attend because you are interested in being able to speak intelligently to your clients about
A. the difference between GOs and revenue bonds.
B. the difference between using mutual funds or UlTs to invest in municipal bonds.
C. Section 529 plans.
D. Section 457 plans.
C. The Securities and Exchange Commission (SEC) has declared that specific Section 529 Education Savings Plans created by state or local government entities are classified as municipal fund securities. Therefore, the buying and selling of state-sponsored Section 529 plans are subject to the regulations of the Municipal Securities Rulemaking Board (MSRB).
If the Plato Fund has a long history of reliably paying dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, Plato is
A. a money market fund.
B. a corporate bond fund.
C. an aggressive growth fund.
D. a municipal bond fund.
D. Municipal bonds are considered one of the safest investments, second only to US government securities. Additionally, interest earned from these bonds is usually exempt from federal income tax. LO 5.h
Which of the following statements regarding Section 529 education savings plans are true?
I. Contributions are considered gifts under federal law.
Il. Contributions are tax-deductible under federal law.
III. Earnings generated are taxable each year.
IV. Earnings generated are tax-deferred.
A. Il and IV
B. I and III
C. Il and III
D. I and IV
D. Contributions made to Section 529 plans are considered gifts under federal law and are not deductible at the federal level. Additionally, earnings generated each year are tax-deferred and, upon withdrawal, are tax-free at the federal level, provided they are used for qualified education expenses. LO 5.h
Test your knowledge of information sources on the municipal bond market.
1. Which municipal publication includes the 30-day visible supply index?
2. Which municipal publication provides the most up-to-the-minute information relevant to the secondary municipal bond market?
- The Bond Buyer
- Thomson Muni Market Monitor
A customer of a municipal securities firm called her registered representative to express her dissatisfaction with the commission charged on her latest trade. The customer was angry and demanded to speak with the representative’s supervisor. The customer continued her outburst with the supervisor and threatened to sue if no action was taken regarding the charge. Under MSRB rules, a record of this complaint
A. must be kept for four years.
B. must be kept for six years.
C. must be kept for the lifetime of the firm.
D. need not be kept.
D. Recordkeeping requirements apply only to written complaints. It can be delivered using “snail” mail or email. In this case, the complaint was only oral, so there is no requirement to keep a record of it. That is the test world. You can be sure that in the real world, your firm would make a record, but the real world is for after you pass the exam.
A municipality is seeking an underwriter for a bond offering. What is the standard step taken to engage the services of an underwriter?
A. The municipality will place an official notice of sale in The Bond Buyer and accept bids from underwriters interested in the offering.
B. The municipality will place a preliminary official statement in The Bond Buyer to identify underwriters interested in the offering.
C. The municipality will set up appointments with various underwriters directly and interview them for the position.
D. The municipality will generally use an underwriter whom they have used in the past and who was successful in underwriting previous issues.
A. Municipalities issue municipal bonds. To ensure they get the best deal for their constituents, municipalities typically use a competitive bidding process to select an underwriter for their bond offering. This involves placing an official notice of sale in a financial newspaper such as The Bond Buyer, which announces the details of the bond issue and invites underwriters to submit bids.
The underwriter who submits the winning bid becomes the lead manager of the bond offering and is responsible for pricing the bonds, creating the offering document, and distributing the bonds to investors. Through this process, municipalities can secure favorable terms and interest rates for their bonds, benefiting their residents by funding essential public services such as schools, roads, and utilities. LO 5.i
A violation of MSRB rules would occur if
A. an associated person held a joint account with a spouse.
B. a representative gave a gift to an associated person of another broker-dealer that was valued at just under $250.
C. a registered representative (RR) recommended geographic diversification to limit risk.
D. a representative made a recommendation to a customer after gathering information about the customer’s financial status, tax status, investment objectives, and other holdings.
B. The Municipal Securities Rulemaking Board (MSRB) has established guidelines about gift-giving in the municipal finance industry. According to these rules, an individual can offer a gift valued at a maximum of $100 per person per year in cash or worth. Furthermore, a municipal finance professional (MFP) can donate up to $250 as a political contribution to a candidate for whom the MFP is eligible to vote. It’s important to note that these regulations are in place to ensure ethical and transparent conduct within the industry and to prevent potential conflicts of interest. LO 5.j
All of the following are used to pay debt service on GOs except
A. sales taxes.
B. license fees.
C. tolls.
D. ad valorem taxes.
C. For the exam, GOs are backed by taxes. There are some exceptions in the real world, but tax collections predominately back GOs. As we will soon see, tolls are a debt service source for revenue bonds.
Which of the following is not included in the definition of coterminous debt?
A. County
B. City
C. School district
D. State
D. Coterminous, or overlapping, debt occurs when property taxes from one property are used to support debt issued by various municipal issuers. For instance, property taxes on a home might support county, city, and school district debt obligations. States do not assess property taxes, so states are not included in the definition of coterminous or overlapping debt.
All of the following might be used to service municipal revenue debt except
A. excise taxes.
B. business license taxes.
C. ad valorem taxes.
D. alcohol taxes.
C. Ad valorem taxes, also known as property taxes, are a type of tax that is based on the value of a property. These taxes are commonly used to support General Obligation (GO) bonds, which state and local governments issue to fund various projects such as schools, hospitals, and infrastructure. The tax levied on a property is determined by its assessed value, typically based on its market value.
Revenue bonds, on the other hand, are a type of bond that is backed by specific revenue streams. These bonds can be supported by special taxes, such as sin taxes, levied on alcohol and tobacco products. Other types of taxes that can be used to back revenue bonds include excise taxes on fuel and business license taxes. These revenue streams provide a reliable source of income for the bond issuer, allowing them to repay the bondholders on time and in full.
Overall, while ad valorem taxes and revenue bonds are both used to fund public projects, they differ in the way they are backed. Ad valorem taxes are supported by the property’s value, while specific revenue streams back revenue bonds. Understanding these differences is essential for investors and taxpayers alike, as it can help them make informed decisions about supporting and financing public projects in their communities.
What is a municipal bond that is guaranteed by the U.S. government?
A. Moral obligation bonds
B. New housing authority bonds (NHAs)
C. Industrial development revenue bonds (IDRs)
D. Special tax bonds
B. NHAs (or PHAs) are issued to construct, maintain, and improve low-income housing. The U.S. government guarantees the rent on these properties. They are considered the most secure of all municipal revenue bonds.
What types of municipal bonds are unlikely to be issued at a discount?
A. BABs
B. BANs
C. CLNs
D. RANs
A. Build America Bonds (BABs) are a type of taxable municipal bond that is issued at their face value, also known as par value. This means that investors pay the total price of the bond upfront and receive interest payments at a fixed rate until maturity. On the other hand, other types of bonds, such as zero-coupon bonds, Treasury bills, savings bonds, and Municipal Notes, are issued at a discount to their face value and do not pay periodic interest payments. Instead, investors receive the total face value of the bond at maturity. In summary, when it comes to bond issuance, BABs are unique in that they are issued at par value, while other types of bonds are issued at a discount and pay their face value at maturity.
Test-taking note: FINRA ignores that BABs are no longer issued in a question like this.
The main advantage of a variable rate municipal bond investment is that
A. the bond is likely to increase in value.
B. the bond’s price should remain relatively stable.
C. the bond is noncallable.
D. the bond’s interest is exempt from all taxes.
B. A variable rate municipal security does not have a fixed coupon rate.
The interest rate is tied to a market rate (e.g., T-bill yields) and is subject to change at regular intervals. Because the interest paid reflects changes in overall interest rates, the bond’s price remains relatively close to its par value.
