Questions I got wrong (6.1)

If an indenture has a closed-end provision, this means that

Additional issues will have junior liens 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: 6.1.2 in the License Exam Manual

Which of the following would NOT be examples of overlapping debt? 1-Debt to build a state office building within city limits. 2-Debt to maintain a county park district serving a municipality. 3-Debt backed by two states cooperating in the construction of a bridge. 4-Debt for a high school district within city limits.

Ans: 1 and 3 State debt cannot overlap with any other municipal entity. Reference: 6.1.2 in the License Exam Manual

A legal opinion evaluates which of the following features of a municipal issue? 1-Marketability. 2-Legality. 3-Tax-exempt status. 4-Economic feasibility. A- 1 and 4 B- 1 and 3 C- 2 and 4 D- 2 and 3

Ans: 2 and 3 A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants. Reference: 6.1.3 in the License Exam Manual

Which of the following are TRUE? 1- Build America Bonds are tax exempt at all levels 2-Direct payment BABs provide the municipal issuer with payments from the U.S. treasury. 3-Build America Bonds are issued by the U.S. Treasury. 4-Tax credit or issuer BABs provide the municipal bondholder with a federal income tax credit.

Ans: 2 and 4 Created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy, Build America Bonds (BABs) are taxable municipal securities. There are two types: Direct payment BABs that provide the municipal issuer with payments from the U.S. treasury and Tax credit or Issuer BABs that provide the bondholder with a federal income tax credit. Reference: 6.1.2 in the License Exam Manual

If an indenture has a closed-end provision, this means that

Ans: Additional issuers will have junior liens 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: 6.1.2 in the License Exam Manual

A project that was funded with a revenue issue has been condemned by the state under an eminent domain proceeding. The outstanding bonds would be subject to which of the following call provisions? A- Prerefunding call B- Catastrophe call C- Refunding call D- Defeasance call

Ans: B, Catastrophe call If a revenue project was condemned under eminent domain, the bonds would be subject to a catastrophe call. Reference: 6.1.2 in the License Exam Manual

If IDBs are called because of condemnation, this would be covered under which of the following clauses in the bond indenture? A- Refinancing B- Defeasance C- Catastrophe D- Refunding

Ans: C Condemnation is considered a catastrophe and only applies to revenue bonds. Reference: 6.1.2 in the License Exam Manual

All of the following would be found in a bond resolution for a new municipal issue EXCEPT: A- A discription of the issue B- The issuer's obligation to bondholders C- The costs to be incurred by the issuer in connection with the offering D- Covenants to which the issuer must adhere

Ans: C, The costs to be incurred by the issuer in connection with the offering The bond resolution (or the bond contract) spells out the characteristics of the issue (maturities, call features, etc.), the issuer's responsibilities to bondholders, and any restrictive covenants to which the issuer must adhere. Costs to be incurred by the issuer have no impact on bondholders. Reference: 6.1.3 in the License Exam Manual

Which of the following would NOT be found in a municipal revenue bond resolution? A- Conditions of the maintenance covenant B- Terms of the rate covenant C- Underwriting agreement D- Reporting requirements regarding revenues collected

Ans: C, Underwriting agreement The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant. The underwriting agreement is between the municipality and underwriters and spells out the terms agreed to for the underwriting of a new issue. Reference: 6.1.2 in the License Exam Manual

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend? A- Treasury bond B-Corporate bond C- Industrial revenue bond D- GO bond

Ans: D General obligation bond Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT. Reference: 6.1.2 in the License Exam Manual

Who signs an official statement for a new municipal issue?

Ans: D, An official or officials of the issuer An official of the issuer, for example, a county treasurer, signs the official statement. Reference: 6.1.3 in the License Exam Manual

Typically, general obligation bonds are not sold short because: A- They are backed by full faith and credit of the issuing authority B- MSRB regulations prohibit short selling C- They trade OTC D- Thin markets may make it difficult to cover a short municipal position

Ans: D, Thin markets may make it difficult to cover a short municipal position Because the municipal trading market is thin, it is often difficult to cover (buy back) a municipal security that has been sold short. It is easy to short 100 shares of GM (borrow the stock), for example, because an equivalent 100 shares of GM can be purchased on the NYSE at any time. Reference: 6.1.2 in the License Exam Manual

Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A- Flow of funds B- Call features C- Catastrophe clause D- The issue's rating

Ans: D, the issue's rating There are different sources for bond ratings but they would not be found within the revenue issues protective covenants. The municipality agrees to abide by the covenants and a trustee appointed in the bond indenture supervises the issuer's compliance with them. Some common covenants are: rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features. Reference: 6.1.2 in the License Exam Manual

SLGS are purchased by

Ans: State and local governments State and Local Government Series (SLGS) Securities are purchased by municipal issuers, which are subject to IRS yield restrictions when they invest the proceeds of a pre-refunding. The monies placed in escrow are invested in SLGS, which are government securities whose interest rates are arranged to comply with IRS restrictions. Reference: 6.1.2 in the License Exam Manual