Debt - Municipal Debt
The best answer is C. Municipal bonds are traded in the over-the-counter market. They are not traded on national stock exchanges. Remember, there is no national trading market in municipals - a requirement for listing - so municipal markets are generally confined to the state of issuance. Bonds can be traded in the OTC market with bank dealers, other brokers, as well as with municipal broker's brokers. These are wholesale firms (of which only 12 exist in the U.S.) that only trade with retail municipal brokers. These firms do not take inventory positions. They act as an agent, usually helping the retail firm with large institutional trades.
Municipal bond traders execute transactions: I on the floor of recognized exchanges II with bank dealers in the over-the-counter market III with brokerage wire houses in the over-the-counter market IV with municipal broker's brokers A. I only B. IV only C. II, III, IV D. I, II, III, IV
The best answer is D. It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments into the account.
Municipal bonds would be an appropriate investment for which of the following? I Individuals II Individual Retirement Accounts III Bank Holding Companies IV Casualty Companies A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV
The best answer is B. Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk. However, if interest rates fall, the price can go above par (by a small amount) until the next reset date.
Municipal variable rate demand notes: I have a minimum value which will never go below par II have a maximum value which will never go above par III are subject to market risk IV are not subject to market risk A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. General obligation bonds are backed by a taxing power pledge. Revenue bonds do not have such backing - instead only the pledge of revenues from some enterprise activity backs the issue. Industrial revenue bonds are a type of revenue bond where a corporation's lease payments are the pledged source of revenue; a lease rental bond is another type of revenue bond where rent payments from a lessee of real property are the source of pledged revenue.
A municipality wishes to sell a bond issue that is NOT backed by taxing power. Which of the following bonds could be issued? I Revenue bond II Industrial revenue bond III General obligation bond IV Lease rental bond A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV
The best answer is D. Ad valorem taxes do not back special tax bond issues. Ad valorem taxes back general obligation bonds. The definition of a special tax bond is one which is not backed by ad valorem taxes, but rather by another tax source (such as excise, sales and income taxes).
Income sources backing a special tax bond issue could be all of the following EXCEPT: A. Excise taxes B. Sales taxes C. Income taxes D. Ad Valorem taxes
The best answer is B. New issues of municipal notes are available only in "book entry" form. The same is true for new issues of municipal bonds.
New issues of short term municipal notes and bonds are available in which forms? I Bearer II Book Entry III Registered to Principal and Interest A. I only B. II only C. III only D. I, II, III
The best answer is D. Variable rate municipal notes avoid market risk, also known as "interest rate risk." A rise in interest rates will not devalue these securities, since they can be put to the issuer at par at each weekly reset date. Thus, the price will not fall below par if interest rates rise. These notes are subject to legislative risk; marketability risk (Can they be liquidated quickly?); and default risk.
Variable rate municipal notes are NOT subject to which of the following risks? A. legislative risk B. default risk C. marketability risk D. interest rate risk
The best answer is A. Hospitals and colleges are often given large monetary gifts - known as "endowments." The institution invests the endowment funds to generate interest and dividend income. It usually agrees not to invade the principal amount. The earnings on the endowment funds are a source of revenue that can be pledged to bondholders under a revenue pledge.
Which of the following revenue bond issues would likely pledge the earnings from invested endowment funds to the bondholders? A. Hospital bond B. Water and Sewer bond C. Mortgage bond D. Turnpike bond
The best answer is A. A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond.
A municipal bond which is secured by taxes OTHER than ad valorem taxes is a(n): A. Special tax bond B. Industrial revenue bond C. Moral obligation bond D. General obligation bond
The best answer is B. A Revenue Anticipation Note (RAN) is issued by a municipality that wishes to borrow short-term against revenues that are expected to be received in the near future. An example would be the City of New York borrowing, via a RAN issue, against a mass transit subsidy payment from the Federal government to be received in the near future.
A municipal note that is issued in anticipation of receiving future revenues is a: A. TAN B. RAN C. TRAN D. BAN
The best answer is C. A municipal variable rate demand note is a long-term municipal security because it has no stated maturity, but it is issued at short-term (lower) interest rates, because the holder has the right to "put" the bond to the issuer at par at each interest payment date. The interest rate is reset, usually weekly at the interest payment date, to an indexed rate for the next week. Thus, the interest rate will vary. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.
A municipal variable rate demand note is: I a short term issue II a long term issue III issued at short-term interest rates IV issued at long-term interest rates A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. If a municipality is at its debt limit, it cannot issue more debt backed by ad valorem taxing power - thus it cannot issue more G.O. bonds; nor can it issue double barreled bonds (the second backing of these issues is ad valorem taxing power). The municipality can issue moral obligation bonds. Moral obligation bonds are backed by pledged revenues and also by a non-binding pledge to report any revenue deficiencies to the state legislature. The legislature is authorized to apportion the funds necessary to service the debt, but is under no obligation to do so. Municipalities do not issue Treasury Bonds - these are issued by the U.S. Government.
A municipality is at its statutory debt limit and cannot legally issue more debt backed by taxing power. Which of the following bonds can be issued? A. General obligation bonds B. Moral obligation bonds C. Double barreled bonds D. Treasury bonds
The best answer is D. The feasibility study performed prior to the issuance of revenue bonds is an economic study that projects revenues and costs for the facility to determine if there will be sufficient net revenues to service the debt. The effect of any competing facilities is included in the study. Legal aspects, such as the trust indenture, are not included in the feasibility study. These are evaluated by the bond counsel. The rest would be evaluated in the feasibility study.
All of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds EXCEPT: A. expected demand for the facility B. effect of competing facilities C. expected operating costs of the facility D. bond trust indenture
The best answer is C. In order to issue revenue bonds, a feasibility study must be prepared and it must show adequate net revenues ("earnings") to service the debt before the bonds can be floated. A revenue bond can be double barreled to improve its safety by additionally backing the issue with the ad valorem taxing power of the issuer. Yields on revenue bonds are higher than that of comparable G.O. bonds because of generally higher risk. Revenue bonds are suitable for investors willing to take on low, medium or high risk. To evaluate credit risk on these issues, look at Moody's or Standard and Poor's ratings.
All of the following are true statements regarding revenue bonds EXCEPT: A. issuance of the bonds is dependent on earnings requirements B. the bonds may be double barreled with backing by ad valorem taxes C. revenue bonds are only suitable for investors willing to assume a high level of risk D. yields for revenue bond issues are generally higher than yields for comparable G.O. issues
The best answer is B. Build America Bonds (BABs) were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the broader corporate debt market (which includes international investors who do not participate in the municipal market) for needed capital projects.
All of the following statements are true about "Build America Bonds" EXCEPT: A. the issuer gets a federal tax credit equal to 35% of the stated interest rate on the issue B. the interest is federally tax exempt C. the bonds give municipal issuers access to the conventional corporate debt market D. the proceeds of the bond issues can only be used for infrastructure improvements
The best answer is A. "BABs" are Build America Bonds. Build America Bonds were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the debt market for needed capital projects.
BABs are: I subject to Federal income tax II exempt from Federal income tax III issued in the taxable bond market IV issued in the tax-exempt bond market A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing).
Construction Loan Notes are repaid from: A. rents received from the housing project built with the proceeds of the offering B. rent subsidies received from the U.S. Government C. monies received from a permanent take-out financing D. monies received from the issuance of the Construction Loan Note
The best answer is B. To ease a temporary cash flow shortage, municipalities will issue either TANs (Tax Anticipation Notes) or RANs (Revenue Anticipation Notes). These notes are paid off when the taxes or anticipated revenues are collected sometime in the near future. Long term bond issues are not appropriate to meet cash flow shortages and CLNs (Construction Loan Notes) are only issued in connection with building projects.
During its fiscal year, New York state is experiencing a temporary cash flow shortage, expected to last for 5 months. To meet current obligations, the state would most likely issue: A. General Obligation bonds B. TANs C. CLNs D. Moral Obligation bonds
The best answer is B. Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule). Since bonds are retired annually, the amount of the payment representing interest declines annually. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases.
From an issuer's standpoint, as the years progress, "level debt service" serial bond issues have: I Decreasing interest payment amounts II Increasing interest payment amounts III Decreasing principal repayment amounts IV Increasing principal repayment amounts A. I and III B. I and IV C. II and III D. II and IV
The best answer is C. GAN stands for "Grant Anticipation Note." A GAN can be issued by a municipality to "pull forward" and get immediate use of federal grant monies that are expected to be received in the upcoming months. These federal grant monies are used for mass transit, energy conservation and pollution control improvements.
If a municipality is expecting to receive federal funding for mass-transit programs, it could borrow against the expected funds to be received by issuing: A. BANs B. TANs C. GANs D. CLNs
The best answer is A. The interest income from municipal bonds is exempt from Federal income tax; but is subject to State and Local tax. However, if a bond is purchased by a State resident, then the State exempts that issue from taxation as well.
Interest income from municipal bonds purchased by a resident of the issuing State is: A. exempt from Federal, State and Local tax B. exempt from Federal tax and subject to State and Local tax C. subject to Federal tax and exempt from State and Local tax D. subject to Federal, State and Local tax
The best answer is B. As a rule, interest income from U.S. Government securities is subject to Federal tax and exempt from State and Local tax. As a general rule, interest income from agency securities is subject to Federal tax and exempt from State and Local tax. However, the interest income from securities issued by the housing agencies that sell pass through certificates is fully taxable. These are: Federal National Mortgage Association ("Fannie Mae") Government National Mortgage Association ("Ginnie Mae") Federal Home Loan Mortgage Corporation ("Freddie Mac") Interest income received from bonds issued by territories or possessions is always triple exempt.
Interest income from which of the following securities is subject to State and Local tax? A. Treasury Bonds B. Federal National Mortgage Association Bonds C. Federal Home Loan Bank Bonds D. Puerto Rico Bonds
The best answer is D. Debt limits do not apply to self supporting debt such as revenue bonds or special tax bonds (payable from excise taxes - voter approval is needed to float these issues, but they are not subject to debt limits). They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).
Issuance of which of the following municipal issues is NOT subject to statutory debt limits? I General obligation bond II Special tax bond III Industrial revenue bond IV Moral obligation bond A. I only B. I and II C. III and IV D. II, III, IV
The best answer is D. Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases; and the interest amount decreases. The total of the two remains the same. This is essentially the same idea as a mortgage amortization schedule.
Level debt service is best described as: A. debt service increases as the years progress B. debt service decreases as the years progress C. principal repayments decrease as the years progress D. principal repayments increase as the years progress
The best answer is A. Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases; and the interest amount decreases. The total of the two remains the same. This is essentially the same idea as a mortgage amortization schedule.
Level debt service is best described as: A. debt service remains the same amount each year B. debt service decreases as the years progress C. principal repayments decrease as the years progress D. principal repayments stay the same as the years progress
The best answer is A. Municipal bonds are traded in the over-the-counter market - with bank dealers, other brokers, as well as with municipal broker's brokers. They are not traded on national stock exchanges.
Municipal bond traders execute transactions in all of the following ways EXCEPT: A. on the floor of recognized exchanges B. with bank dealers in the over-the-counter market C. with brokerage wire houses in the over-the-counter market D. with municipal broker's brokers
The best answer is A. It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments, into the account. Tax is due only when the positions are liquidated and the funds withdrawn from the account. Individuals in high tax brackets buy municipal bonds for their federal income tax exemption; insurance companies buy municipal issues as part of their portfolios; and banks buy municipals as part of their investment portfolio (for example, they purchase "bank qualified" municipal issues that give the bank a large tax advantage).
Municipal bonds would not be an appropriate investment for which of the following? A. Individual Retirement Accounts B. Individuals C. Casualty Companies D. Bank Holding Companies
The best answer is B. Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk and the yield cannot go above the stated rate. However, if interest rates fall, the price can go above par (by a small amount) and the yield can fall below the stated rate until the next reset date.
Municipal variable rate demand notes I have a market value which will never go below par II have a market value which will never go above par III have a yield which will never fall below the stated rate IV have a yield which will never rise above the stated rate A. I and III B. I and IV C. II and III D. II and IV
The best answer is D. Variable rate bonds, also known as reset bonds, have a rate of interest that is reset periodically, usually weekly, based upon a recognized interest rate index that usually consists of Treasury Issues. At the reset date, the note is puttable back to the issuer at par (payable on demand of the holder, hence the term "demand note"). This was the first attempt by municipal issuers to sell long term bonds (because there is no stated maturity) at short-term interest rates (which are usually lower).
Municipal variable rate demand notes: I have an interest rate that is fixed throughout the life of the bond II have an interest rate that is reset periodically III are considered short term municipal notes IV are considered long term municipal notes A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.
Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to: A. meet a temporary cash shortage due to unforeseen extraordinary expenses B. refund an outstanding bond issue C. provide construction period financing that will be permanently financed by a future bond sale D. smooth out collections of funds that are normally subject to seasonal fluctuations
The best answer is C. Municipal commercial paper is not very popular. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short-term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a CLN - construction loan note). Commercial paper cannot be used for long term financing such as a bond refunding. Remember, commercial paper is a short term promissory obligation - not long term.
Municipalities would issue tax exempt commercial paper for which of the following reasons? I To smooth out collections of funds that are normally subject to seasonal fluctuations II To meet a temporary cash shortage due to unforeseen extraordinary expenses III To refund an outstanding bond issue IV To provide construction period financing that will be permanently financed by a future bond sale A. I only B. III only C. I, II, IV D. I, II, III, IV
The best answer is A. Municipal bonds are usually not sold short because the trading market is very limited. Unlike corporate securities and government securities which receive no special tax status, municipal bonds are typically exempt from state and local tax if purchased by a resident of that state (in addition to the federal tax exemption). Thus, trading of municipal issues is typically confined to the state in which it was issued: there is no national trading market. Shorting a security requires the trader to buy back (and therefore replace) the exact security that was sold. This is difficult to do if there are few bonds trading at any one time. Another important reason why munis are not shorted is because most issues are serial bonds. Serial bonds mature over a sequence of years. Thus, if a bond maturing in the year 2030 is shorted, it must be replaced with a 2030 bond. Out of the total issue, there may have been very few 2030 bonds, further limiting the potential trading market.
Short sales rarely occur in the trading market for which of the following securities? A. Municipal bonds B. Corporate bonds C. Government bonds D. Agency bonds
The best answer is C. Interest income derived from municipal bonds is currently exempt from federal income tax; however it is subject to state and local tax unless the state exempts the issue from taxation. Most states allow this only for issues that are purchased by residents of that state.
Significant investment features for the purchaser of municipal bonds include all of the following EXCEPT: A. interest is currently federal tax exempt B. maturities and issues may be diversified C. interest is currently state and local tax exempt D. insured issues are available for customers wishing minimum credit risk
The best answer is C. Interest income derived from municipal bonds is currently exempt from federal income tax; however, it is SUBJECT to state and local tax unless the state exempts the issue from taxation.
Significant investment features for the purchaser of municipal bonds include which of the following? I Maturities and issues may be diversified II Insured issues are available for customers wishing minimum credit risk III Interest is currently federal tax exempt IV Interest is currently state and local tax exempt A. I and II only B. III only C. I, II, III D. I, II, III, IV
The best answer is D. A special assessment bond is one which is used to fund an improvement that benefits only a segment of the population; and only those people are charged taxes to pay for that improvement. Such taxes cannot exceed the value of the benefit received. This makes them totally different from general tax collections which have no such "tie-in".
Special assessment bond issues are used to fund a public improvement that will: I accrue to the public at large II accrue to segment of the public III be paid from taxes which have no relationship to the value of the benefit received IV be paid from taxes which have a relationship to the value of the benefit received A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions.
The Bond Resolution is the contract between the: A. issuer and bondholder B. bond counsel and issuer C. bond counsel and bondholder D. issuer and Municipal Securities Rulemaking Board
The best answer is D. The bond counsel will review all of the choices given to ascertain if a municipal issuer has the authority to sell bonds - the State constitution which gives those powers; any enabling legislation which affects the issuance of new bonds; any court opinions that are relevant; and the counsel will ascertain that the issuer's representatives are authorized to sell the bonds.
The bond counsel will review which of the following to ascertain if a municipal issuer has the authority to sell bonds? I State constitution II Validity of the signatures of the issuer's representatives III Enabling legislation IV Local statutes and judicial opinions A. I and II B. III and IV C. I, III, IV D. I, II, III, IV
The best answer is D. The feasibility study in a revenue bond offering is a projection of building costs; expected revenues; and expenses. The net result should show that the revenues anticipated from the project are sufficient to pay for both operation and maintenance of the facility and interest expense on the bonds issued to finance the construction, as well as cover the repayment of the bonds. This study is performed by an independent consulting firm.
The feasibility study prepared in connection with a new municipal revenue bond offering is performed by the: A. issuer B. underwriter C. bond counsel D. independent consultant
The best answer is B. Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.
The manager of a pension plan would most likely invest in which of the following debt issues? I Corporate Bonds II Municipal Bonds III Government Bonds A. I only B. I and III only C. II and III only D. I, II, III
The best answer is B. With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes will fluctuate up or down, depending upon market interest rates. Thus, the note always gives a yield that approximates current interest rate levels so the market price of these securities will remain fairly constant. These notes avoid "interest rate risk," also known as market risk, since a rise in interest rates will not devalue these securities. However, they still may have marketability risk (the risk that the securities cannot be easily sold); and can have credit risk.
The principal advantage of purchasing a variable rate municipal note is: A. The interest rate can be expected to remain fairly stable B. The market value can be expected to remain fairly stable C. The marketability risk can be expected to be lower D. The credit risk can be expected to be lower
The best answer is C. Trades of municipal securities settle "regular way" 2 business days after trade date. Note that "T" is the abbreviation for trade date.
Trades of municipal bonds settle "regular way" on: A. T B. T + 1 C. T + 2 D. T + 5
The best answer is B. A revenue bond is backed by a "revenue pledge" - these are specific revenues from an enterprise activity (such as the revenue from operating an airport financed with an airport revenue bond issue). Other revenues (such as the revenue from a nearby toll bridge) would be used to pay for a revenue bond issue used to finance the building of that bridge - not of the airport, making Choice A incorrect. Tax collections by states and municipal entities are used to back General Obligation bonds, not revenue bonds.
What will back a municipal revenue bond? A. Any municipal revenue collected B. The specific revenue stipulated in the bond's Official Statement C. Taxes collected by the state of issuance D. Taxes collected by the issuing municipal entity
The best answer is C. In order to issue revenue bonds, a feasibility study must be prepared and it must show adequate net revenues ("earnings") to service the debt before the bonds can be floated. A revenue bond can be double barreled to improve its safety by additionally backing the issue with the ad valorem taxing power of the issuer. Yields on revenue bonds are higher than that of comparable G.O. bonds because of generally higher risk. Revenue bonds are suitable for investors willing to take on low, medium or high risk. To evaluate credit risk on these issues, look at Moody's or Standard and Poor's ratings.
Which of the following are TRUE statements regarding revenue bonds? I Yields for revenue bond issues are generally higher than yields for comparable G.O. issues II Revenue bonds are only suitable for investors willing to assume a high level of risk III The bonds may be double barreled with backing by ad valorem taxes IV Issuance of the bonds is dependent on earnings requirements A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV
The best answer is C. The feasibility study performed prior to the issuance of revenue bonds is an economic study that projects revenues and costs for the facility to determine if there will be sufficient net revenues to service the debt. The effect of any competing facilities is included in the study. Legal aspects, such as the trust indenture, are not included in the feasibility study. These are evaluated by the bond counsel.
Which of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds? I Expected demand for the facility II Effect of competing facilities III Expected operating costs of the facility IV Bond trust indenture A. I and III only B. III and IV C. I, II, III D. I, II, IV
The best answer is C. Municipal issuers offer bonds in the primary market. Issuers do not trade their outstanding debt. Bank dealers, general securities dealers and municipal broker's brokers all trade in the secondary market.
Which of the following are participants that trade municipal bonds in the secondary market? I Bank dealers II General securities dealers III Issuers IV Municipal broker's brokers A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV
The best answer is C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.
Which of the following are sources of income that can be used for debt service on municipal revenue bonds? I User Fees II Special Taxes III Lease Rentals IV Capitalized Interest A. I and III only B. II and IV only C. I, II, III D. I, III, IV
The best answer is A. The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions. The credit rating is given by the ratings agencies (e.g., Moody's or Standard and Poor's); and is found in their publications. The underwriter's compensation is disclosed to investors in new negotiated municipal bond offerings in the Official Statement (the disclosure document, similar to a prospectus, for new municipal issues).
Which of the following information would be found in a municipal bond resolution? I Any restrictive covenants to which the issuer must adhere II Any call provisions providing for redemption prior to maturity as specified in the contract III The credit rating assigned to the issue by a nationally recognized ratings agency IV The compensation received by the underwriters for selling the issue to the public A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV
The best answer is A. Municipalities issue BANs (Bond Anticipation Notes) to "pull forward" funds that will be collected from a later permanent bond sale. For example, a municipality expects to float a 20 year bond issue in 6 months. It can get the funds today by issuing 6 month BANs now. When the bond issue is floated, the proceeds are used to pay off the BANs. Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue. RANs (Revenue Anticipation Notes) are issued to "pull forward" revenues that are expected to be received by the municipality in the coming months. For example, the City of New York will receive a $200,000,000 payment from the Federal government on July 1st to support mass transit. It is now April 1st. The city can issue 3-month RANs and borrow against the upcoming revenue to be received from the Federal Government. A TRAN is a combination Tax and Revenue Anticipation Note.
Which of the following municipal issues is a short term note that is retired by a later permanent bond sale? A. BAN B. RAN C. TAN D. TRAN
The best answer is B. A "double barreled" bond is a revenue issue that is also backed by a municipal issuer's taxing power. A revenue bond backed by two sources of revenue is known as a parity bond since the bondholders have equal claim to both sources of revenue backing the bond issue.
Which of the following municipal securities would be considered a "double barreled" issue? A. Revenue Bond backed by two sources of revenue B. Hospital Revenue Bond backed by Ad Valorem taxing power C. Moral Obligation Bond D. Bond Anticipation Note
The best answer is C. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.
Which of the following projects would be financed by a revenue bond issue? I The construction of a new subway line II The construction of a new junior high school III The construction of a new hydroelectric generating plant IV The construction of a new sewage treatment plant A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV
The best answer is D. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states. A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.
Which statements are TRUE about a Certificate of Participation (COP)? I COPs are subject to statutory debt limits II COPs are not subject to statutory debt limits III COPs have a higher credit rating than G.O. bonds of the same issuer IV COPs have a lower credit rating than G.O. bonds of the same issuer A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Any bond issued by an "authority" is a revenue bond issue - such as the "Port Authority of New York" or the "New Jersey Turnpike Authority." Moral obligation bonds are typically issued by state agencies or authorities, and are secured by the revenues from the financed project (recent issues have been used to finance hyper-expensive ball stadiums, where the projected revenues appear to be insufficient to cover all costs), and additionally, by a non-binding undertaking that any deficiency in pledged revenues will be reported to the State legislature which may apportion State monies to make up the shortfall. Thus, the State has a moral obligation to pay; but not a legal obligation to pay.
Which statements are TRUE regarding moral obligation bonds that are issued by authorities: I The bonds are typically secured by the revenues from a financed project II The bonds are typically secured by the special taxing power of the issuer III Ultimate payment on a moral obligation bond occurs if the U.S. Government apportions the funds to service the debt IV Ultimate payment on a moral obligation bond occurs if the State legislature apportions the funds to service the debt A. I and III B. I and IV C. II and III D. II and IV
The best answer is B. Industrial Development Bonds are issued by municipal authorities, with the revenue source being the lease payments made by a corporate lessee. Furthermore, the corporate lessee unconditionally guarantees the bonds - so they take on the credit rating of the corporate guarantor.
Who guarantees an Industrial Development Bond? A. Municipal issuing authority B. Corporate lessee C. MBIA D. AMBAC
