Unit 6 Municipal Bonds
1 Mill is equal to what?
1 Mill= $0.001
Achieving a Better Life Experience (ABLE) accounts are tax-advantaged savings accounts for individuals with disabilities and their families. The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age
26...One need not be under the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26, but as long as the onset of the disability occurred before age 26, the person is eligible to establish an ABLE account.
Your client is considering two bonds: an ABC Corporation mortgage bond with a coupon yield of 9% and a municipal bond issued by the state that she resides in. If your client is in the 32% tax bracket, what is the tax-free equivalent yield for the corporate mortgage bond so that she will be able to compare it to the tax-free municipal bond she is considering?
6.12% When the yield on the corporate taxable bond is given and the question asks for the equivalent after-tax yield of a tax-free municipal bond, we calculate that as follows: corporate rate × (1 − investor's tax bracket). In this case, 0.09 × (1 − 0.32) = 0.09 × 0.68 = 0.0612, or 6.12%. Without all of those zeros, it is 9% × 68% = 6.12%. Alternatively, just subtract the 32% tax from 9%. That would be 9% − (9% × 32%) = 9% − 2.88% tax = 6.12%. Remember, because the investor is paying taxes at a rate of 32%, she is keeping only 68% of the income received on a taxable security compared to 100% on a tax-free municipal bond. When the coupon rate of the tax-free security is given and the question is asking about the tax-equivalent yield of that security (it will always be higher than the coupon), we need to divide. Divide the municipal coupon rate by (100% minus the tax bracket). For example, if this question has said that the coupon on the municipal bond was 6.12% and asked for the TEY, you would divide 6.12% by 68%. Do that on your calculator and the result is 9%. The key to remembering which formula works is that when the coupon on the taxable security is given, the answer will always be lower than that coupon. That means subtracting. When the coupon on the tax-free security is given, the answer will always be higher than that coupon and that means dividing.
Which of the following quotes represents a municipal dollar bond quote? A) 85½ B) 8.20 - 8.00 C) $850 - $870 D) 0.085
85½ Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85.5% of $1,000, or $855.
Which of the following would be most likely to require a mandatory sinking or surplus fund?
A water and sewer revenue bond Sinking or surplus funds force revenue bond issuers to set aside a portion of their revenue for debt retirement.
To calculate a capital gain or loss on the sale of an original issue Premium municipal bond, the discount must be
Amortized Amortization is the means of adjusting a premium bond's cost basis.
The interest from which of the following bonds is subject to federal income tax? State of Nebraska City of Duluth Treasury notes Federal National Mortgage Association (FNMA)
B) III and IV Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.
The tax on municipal bonds is...
Federally exempt, taxable on the state and local level for NON-RESIDENT INVESTORS, and exempt on all levels in Puerto Rico
Which of the following statements are true? Build America Bonds (BABs) are tax exempt at all levels. Direct-payment BABs provide the municipal issuer with payments from the U.S. Treasury. BABs are issued by the U.S. Treasury. Tax credit or issuer BABs provide the municipal bondholder with a federal income tax credit.
II and IV Created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and to stimulate the economy, 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.
A municipal securities principal must approve all of the following except A) the opening of new customer accounts. B) the handling of written customer complaints. C) each transaction in municipal securities. D) legal opinions.
Municipal securities principals are required to approve all new customer accounts, all municipal transactions, and the handling of customer complaints. Legal opinions are prepared by bond counsel to determine the authority of an issuer and tax treatment of new municipal issues.
Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) State governments B) County governments C) Municipalities D) School districts
State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.
Net Revenue Pledge
The flow of funds arrangement in A municipal revenue bond issue pledging that operating and maintenance expenses will be paid before debt service. The pledge is contained in the trust indenture. Related item(s): gross revenue pledge.
Gross Revenue Pledge
The flow of funds arrangement in a municipal revenue bond issue indicating that debt service is the first payment to be made from revenues received. The pledge is contained in the trust indenture.
Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.
The tax covenant Unless something in the question refers to special taxes, revenue bonds do not have tax backing. The other items are included in the bond resolution (or trust indenture). The rate covenant is a promise to maintain rates sufficient to pay expenses and debt service. The maintenance covenant is a promise to maintain the equipment and facility/facilities. The insurance covenant is a promise to insure any facility.
Do GO bonds require voter approval?
Yes
The term municipal fund security refers to...
a Section 529 savings plan. Section 529 plans, used primary for saving for college, are legally considered municipal fund securities.
To calculate a capital gain or loss on the sale of an original issue discount municipal bond, the discount must be
accreted.... The IRS term for adjusting the cost basis of a discount bond upward is accretion. Amortization is the means of adjusting a premium bond's cost basis.
A municipal finance professional (MFP) is...
an employee of a broker-dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker-dealer. Per the MSRB, an MFP is an associated person of a broker-dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker-dealer, or who is in the supervisory chain above MFPs.
ad valorem taxes are based on...
real-estate and other things
Interest received on a California general obligation bond purchased by a San Francisco resident is exempt from
state and federal income taxes. A municipal bond is generally exempt from federal and state income taxes in the state in which it was issued. The exemption, or lack thereof, applies to interest, not capital gains.
The capital gains on municipal bonds are...
taxable...Amount received at sale or maturity - adjusted basis = Cap gain or loss
An unqualified legal opinion means that...
the bond counsel has rendered an opinion without any qualifying limitations. An unqualified legal opinion means that the bond counsel found no problems with the issue. A qualified opinion means that the issue is legal, but certain contingencies exist. For example, the bond counsel might render a qualified opinion because authority to tax is in question or the issuer does not have clear title to the property.
Your FINRA member firm takes 100 GO bonds from a municipal bond dealer out-firm for one hour. This means that...
your firm controls the bonds for one hour. A municipal securities dealer may quote a bond price that is firm for a certain time. This is called an out-firm with recall quote. Generally, these quotes are firm for an hour (or half hour) with a five-minute recall period. During this time, the municipal dealer cannot offer those bonds to anyone else—they are under the control of your firm.
