Municipal Bonds: Local Government Securities (Ch. 8)

Rule G-39 (Telemarketing)

Establishes telemarketing requirements with respect to the municipal securities activities of dealers

Block

Large quantity of stock or large dollar amount of bonds held or traded. As a rule of thumb, 10,000 shares or more of stock and $200,000 or more worth of bonds would be described as a ____.

Ascertaining marketability of GO bonds

- Characteristics of the issuer - Factors affecting the issuer's ability to pay - Municipal debt ratios - Credit rating - Maturity (the shorter the better) - Call features (noncallable bonds better) - Coupon rate - Block size (the larger the better) - Dollar price (lower is better) - Issuer's reputation for paying off debt - Sinking fund (having one is better) - Insurance against default

MSRB Enforcers

- FINRA (NASD; primary enforcer) - SEC - Governors of the Federal Reserve Banks - Comptroller of Currency - Federal Deposit Insurance Corporation (FDIC) US TREASURY AND NYSE DO NOT ENFORCE MSRB RULES

Assessing the taxes, fees, and fines of a municipality when considering suggesting a GO bond to a customer

- Property values (investors prefer higher property values) - Population (higher population better; population trend important too, more people moving in than out) - Tax base (comprised of the number of people living in the municipality, the assessment property values, and how much the average person makes. Larger tax bases are ideal) - Sales per capita (the amount of goods the average person buys) - Traffic fines and licensing fees

Municipal zero-coupon bond

A bond in which no periodic coupon is paid over the life of the contract. Instead, both the principal and the interest are paid at the maturity date. Additionally, the interest is tax-exempt.

Original issue discount

A bond or other debt security that is issued at less than par but can be redeemed for full par value at maturity. The appeal, from an investor's perspective, is being able to invest less up front while anticipating full repayment later on. Issuers like these securities as well because they don't have to pay periodic interest. Instead, the interest accrues during the term of the bond so that the total interest when combined with the principal equals the full par value at maturity.

Crossover refunding

A bond that is issued to redeem another bond before maturity. It differs from other refunding bonds in that proceeds from a crossover refunding bond are held in escrow until the date at which the first bond is actually redeemed.

Lease revenue

A bond that is secured by lease payments made by the party leasing the facilities that were financed by the bond issue. Typically, ___ are used to finance construction of facilities (e.g., schools or office buildings) used by a state or municipality.

Refunding bond

A bond that retires another bond before the first bond matures. A company may issue a ____ for a number of reasons, but mainly because of a decline in interest rates, which reduces the cost of funding. ____ deprive bondholders of the first bond from future coupon payments to which they would otherwise of have been entitled. Most bonds are nonrefundable for at least five or 10 years after issue, but a ____ may be issued afterward.

Advertising and record keeping rules

A brokerage firm has to keep all advertising (includes any material designed for use in the public media) for a minimum of three years, and these ads must be easily accessible for at least two years. The Municipal Securities Rulemaking Board (MSRB) requires a principal (manager) to approve all advertising material of the firm prior to its first use. The principal must ensure that the advertising is accurate and true.

The Bond Buyer

A comprehensive weekday publication (Monday through Friday) that provides detailed information about the bond market, especially the municipal bond segment. Established in 1891, the publication includes data on yields, new issues, underwriters, the placement ratio, and nearly everything else of interest to professional bond buyers. The Bond Buyer is published both in hard copy and online.

Bond indenture

A contract for a bond. A ____ sets the terms of the bond; for example, it includes the coupon rate, the period until maturity, and whether the bond comes with any special features like convertibility or whether it is callable. Although not required by law, almost every municipal bond comes with a ____, as it makes them more marketable. ____ are usually summarized in a bond's prospectus. Included in the ___ are the flow of funds and any assets that may be backing the issue.

Alternative minimum tax (AMT)

A federal tax ensuring that all taxpayers pay at least the minimum federal income tax for their income level, no matter how many deductions or credits they claim. The AMT is actually an extra tax, calculated separately and added to the amount the taxpayer owes in regular income tax. Some items that are usually tax exempt become taxable and special tax rates apply. For example, income on certain tax-free bonds is taxable.

Additional bonds test

A financial statement that a company must issue before making a new issue of a bond. The ____ shows what assets the potential issuer has available to pay coupons on the bond. It helps ensure the issuer is able to service debt on the new issue. The ____ increases the transparency of the market and helps one accurately gauge the risk of the new bond issue.

Electronic Municipal Market Access (EMMA)

A free comprehensive online source of information about municipal bonds and is designed specifically for the nonprofessional investor.

Net debt

A measure of a company's ability to repay all debt if it were called immediately. It is calculated by adding short-term and long-term debt and subtracting all cash and cash equivalents. Many investors use net debt in making investment decisions, as it gives them an idea of a company's financial health and its level of leverage compared to liquid assets. Some industries may have more ___ than others; therefore, investors often compare a company's ___ to others in the same business.

Outside audit

A measurement and report on the state of a business' finances, made by an external agency. Often, companies hire audit firms to look at their financial states and to receive an objective assessment.

Moral obligation bonds

A municipal bond backed by the moral, but not legal, obligation from the state government to pay off the debt if the municipality cannot. Given the additional backing of the state, they're considered safe. ____ need legislative approval to be issued.

Industrial development revenue bonds (IDRs; also known as private activity bonds, PABs)

A municipal bond in which a local government entity is seeking to raise money for a private company. A municipality issues an ____ when it wishes to attract a business and the jobs it brings to the area, especially when the business may be otherwise unable to obtain financing for the project. ____ are backed by lease payments made by a company. Because the company is backing the bonds, the credit rating of the bonds is derived from the credit rating of the company.

Taxable municipal bond

A municipal bond in which a local government entity seeks to raise money for a private company with no obvious public benefit. The municipality issues a ___when it wishes to attract a business and the jobs it would bring to the area, especially when the business may be otherwise unable to obtain financing for the project (e.g., sports stadiums). While this may benefit the area in the long term, the bond remains taxable unless the municipality can prove that a public benefit derives directly from the bond. ___ generally are not guaranteed by the revenue of the municipality.

Public housing authority bonds (PHAs; also known as New housing authority bonds, NHA)

A municipal bond issued by local housing authorities to build and improve low-income housing. These bonds are backed by U.S. government subsidies, and if the issuer can't pay off the debt, the U.S. government makes up any shortfalls. Because they are backed by the issuer and the U.S. government, they're considered among the safest municipal bonds.

Ex-legal

A municipal bond offered without a law firm's legal opinion. A majority of bonds are issued with legal opinions.

Unlimited tax bond

A municipal bond secured by the pledge to levy taxes until full repayment at an unlimited rate.

Special assessment (special district) bonds

A municipal bond with interest paid by the taxes of the community benefiting from the bond-funded project. For example, if a ____ is issued to pay for road repairs on a certain street, only the houses and other buildings on that street will pay higher property taxes.

Double-barreled bonds

A municipal bond with the coupon and principal guaranteed both by the general revenue of the municipality issuing the bond and by the revenue of the project the bond finances. If the revenue from the project is less than expected and is not enough to make payments, the municipality will make them instead. A ____ is intended to reduce the risk to the bondholder to the least possible amount; therefore, interest rates on them are fairly low.

Limited-tax general obligation bonds (LTGO)

A municipal bond with two distinguishing features. First, as a general obligation bond, it is secured by all revenues the issuing municipality generates that are not otherwise secured. That is, unless a municipality's revenue specifically secures another bond, the municipality must theoretically use all of its other revenue to pay the bond. Secondly, because it is a limited-tax bond, its provisions place a maximum possible tax increase that the municipality can levy if its other revenues come up short. The first provision reduces the bond's risk, while the second provision increases it.

Insurance covenant

A provision governing a municipal revenue project financed by a revenue bond issue, which promises that the municipality will adequately insure the facility.

Maintenance covenant

A provision governing a municipal revenue project financed by a revenue bond issue, which promises that the municipality will adequately take care of the facility and any equipment so the facility continues to earn revenue.

Rate covenant

A provision governing a municipal revenue project financed by a revenue bond issue, which promises that the municipality will charge sufficient fees to people using the facility to be able to pay expenses and the debt service (principal and interest on the bonds).

Net revenue pledge

A provision in some municipal bonds requiring the issuer to use the revenue the bond raises after expenses to pay for the debt service. For example, if a bond issue raises $10 million, but the project it intends to finance only costs $8 million, a ____ would require the issuer to use the remaining $2 million to service the debt from the bond. A ___ exists in order to make the municipal bond less risky for investors; a bond indenture that contains a ____ is more likely to receive a higher credit rating than one that does not have one.

Gross revenue pledge

A provision in the indentures of some municipal bonds stating that the first priority of the revenue from the bond shall service debt or be set aside to pay the coupons to bondholders. The project a bond intends to finance is relegated to second place, and may be funded from other sources in addition to the bond. This places a difficulty on the issuer, but reduces the risk of default to bondholders. It also allows the bond to be issued at a lower interest rate, which is good for the issuer.

Bond rating

A rating based on the possibility of default by a bond issuer. The three major rating services—Fitch, Moody's, and Standard & Poor's—use AAA as their highest rating and grade down through Bs and Cs. (D is used only by Fitch.) Debts rated AAA, AA, A, and BBB are considered investment-grade. Higher rated bonds provide lower returns, the price an investor pays for greater safety.

White's marketability rating

A ratings service that investigates tax exempt bonds. It rates a bond on a scale of one to 100 according to its liquidity, that is, the ease with which it can be bought and sold. Importantly, unlike other rating services, ____ does not account for the issuer's creditworthiness.

Real Time Reporting System (RTRS)

A requirement imposed on market makers (and in some instances, non market makers) to report each trade immediately (within 90 seconds) after the transaction is completed.

Catastrophe clause

A revenue bond clause stating that if a facility is destroyed due to a catastrophic event such as a flood, hurricane, tornado, or the life, the municipality will use the insurance that it purchased to call the bonds and pay back bondholders.

90-day apprenticeship period

A rule that states new registered representatives can't engage in any municipal securities business with the public for their first 90 days in the industry. Note: registered representatives can still receive commissions from selling other types of securities.

Tax-exempt commercial paper

A short-term bond usually issued by organizations such as universities with permission of the government. This debt obligation usually lasts only a few months to help the organization cover its short-term liabilities.

Tax and revenue anticipation notes (TRANs)

A short-term municipal obligation that is a combination of TANs and RANs

Tax anticipation notes (TANs)

A short-term municipal obligation that is sold to provide funds for government operations until taxes have been received. At that time the receipts are used to repay the debt. These generally low-risk securities appeal primarily to larger investors.

Revenue anticipation notes (RANs)

A short-term municipal obligation that provide financing for current operations in anticipation of future revenues that the municipality will collect.

Grant anticipation notes (GANs)

A short-term municipal obligation that provide interim financing for the municipality while it's waiting for a grant from the U.S. government. The notes are paid off from the grant funds once received.

Bond anticipation notes (BANs)

A short-term municipal obligation that provide interim financing for the municipality while it's waiting for long-term bonds to be issued.

Project notes (PNs)

A short-term municipal obligation that provides interim financing for the building of subsidized housing for low-income families.

Construction loan notes (CLNs)

A short-term municipal obligation that provides interim financing for the construction of multifamily apartment buildings.

Official statement

A statement that the issuer of a municipal bond makes before the issue takes place. The ___ describes the issuer and the bond. It is the equivalent to the registration statement required of corporate securities.

Ad valorem

A tax calculated as a percentage of the value of an asset. Most property taxes are ____ taxes because the property owners owe a given percentage of the market value the property. ___ taxes are the largest source of backing for GO bonds. When dealing with Series 7 questions that ask you to calculate the ____ taxes for an individual, always go with the assessed value, not the market value. ____ taxes are based on mills, or thousandths of a dollar (1 mill = $0.001). To help remember that a mill equals 0.001, remember that "mills" has two l's, so you need to have two zeros after the decimal point.

Municipal notes

A temporary debt incurred by states, local governments, and special jurisdictions. ___ bring money into the municipality until other revenues are received. They are usually issued with a maturity length of 12 months, although maturities can range from 3 months to 3 years. Their rating differ from municipal or corporate bonds. ___ have ratings as follows (from best to worst): Moody's: MIG 1, MIG 2, MIG 3, MIG 4 Standard & Poor's: SP-1, SP-2, SP-3 Fitch: F-1, F-2, F-3

Thomson Muni Market Monitor (aka Munifacts)

A wire service advisory letter that provides information to traders in municipal bonds.

Confirmation

A written statement a broker issues after a trade (settlement date) spelling out what exactly transpired, including the price, commissions, applicable fees, and the terms of trade. Municipal securities settle the regular way (three business days after the trade date).

The 25 Revenue Bond Index (aka RevDex)

An index based on the average yield of 25 revenue bonds with 30 years to maturity rated A or better

Municipal Bond Index (aka 40-Bond Index)

An index that displays the average dollar price of 40 highly traded GO and revenue bonds with an average maturity of 20 years and a rating of A or better.

The 20-Bond GO Index (aka Bond Buyer's Index)

An index tracking the yields of 20 municipal bonds with 20-year maturities and a high average credit rating (A or better). It is considered a benchmark for municipal bond yields.

Gifts rules

According to Municipal Securities Rulemaking Board (MSRB) rules, municipal securities dealers can't give gifts valued at more than $100 per year to customers (to prevent bribery). Business expenses are exempt.

Commissions rules

All commissions, markups, and markdowns must be fair and reasonable, and policies can't discriminate among customers. The items that firms should consider follow: - The market value of the securities at the time of the trade - The total dollar amount of the transaction. Although you're going to charge more money for a larger transaction, the percentage charged is usually lower. - The difficulty of the trade. If you had to jump through hoops to make sure the trade was completed, you're entitled to charge more. - The fact that you and the firm that you work for are entitled to make a profit

Credit enhancement

An addition to a bond issue that improves the issue's safety of principal and interest. For example, the purchase of insurance guaranteeing payments on a bond issue is ____.

The 11-Bond GO Index

An index based on the average yield of 11 municipal bonds from the 20 bond index that mature in 20 years and carry an average AA rating.

Financial report

Any list of the assets and liabilities of a company designed to show its financial health, profits or losses, and/or other variables. The two most common ____ are the balance sheet and the income statement. Publicly-traded companies and some others are legally required to publish certain ____.

Overlapping debt

Debt of a municipality that is shared with another political entity. For example, a city may share responsibility with the county in which the city is located for bonds issued by the county to finance a facility such as a public auditorium.

Net direct debt

Debt that a municipality obtained on its own, stemming from GO bonds and short-term municipal notes. Revenue bonds are not included because they're self-supporting.

Rule G-11 (Primary Offering Practices)

Establishes terms and conditions for sales by municipal securities dealers of new issues of municipal securities in primary offerings, including provisions on priority of customer orders

Rule G-12 (Uniform Practice)

Establishes uniform industry practices for processing, clearance and settlement of transactions in municipal securities

Escrow to maturity

Holding of the proceeds from a new bond issue to pay off an existing bond issue at its maturation date.

Basis points

In the bond market, the smallest measure used for quoting yields. Each percentage point of yield in bonds equals 100 ____. ____ also are used for interest rates. An interest rate of 5% is 50 ____ higher than an interest rate of 4.5%.

Flow of funds

In the context of municipal bonds, refers to the statement displaying the priorities by which municipal revenue will be applied to the debt, such as: 1. Operation and maintenance 2. Debt service (principal and interest on the bonds) 3. Debt service reserve (money placed in reserve to pay one year's debt service) 4. Reserve maintenance fund 5. Renewal and replacement fund 6. Surplus fund (used for several purposes, such as redeeming bonds, paying for improvements, etc.

Triple tax-free

Municipal bonds featuring federal, state, and local tax-free interest payments. This usually involves bonds issued by U.S. territories, such as Puerto Rico, Guam, U.S. Virgin Islands, American Samoa, Washington D.C. Additionally, to be eligible for ___ status, a bondholder must be resident in the municipality and/or state issuing the bond. ___ bonds almost always offer low returns, exposing bondholders to inflation risk. If investors sell municipal bonds for more than their cost basis, the investors have to pay taxes on the capital gains.

Revenue bonds

Municipal bonds issued to finance public projects, such as airports and hospitals. The bonds are backed by revenue to be generated by the project. Because they are not backed by taxes, they don't require a voter approval. In addition, they require a feasibility study to answer the question "Does this make sense?" They also involve covenants (promises that protect investors by holding the issuer legally accountable).

Rule G-27 (Supervision)

Outlines requirements for the supervision of personnel engaged in activities involving municipal securities activities

Rule G-33 (Calculations)

Prescribes standard formulas for the computation of accrued interest, dollar price and yield, standards for accuracy; establishes day counting methods

Rule G-20 (Gifts, Gratuities and Non-Cash Compensation)

Prohibits a dealer from giving gifts or providing services in excess of $100 to another person in relation to the municipal securities activities of such person's employer; limits the giving and acceptance of non-cash compensation

Rule G-37 (Political Contributions and Prohibitions on Municipal Securities Business and Municipal Advisory Business)

Prohibits dealers from engaging in municipal securities business and municipal advisors from engaging in municipal advisory business with a municipal entity within two years of a contribution to an official of such municipal entity made by: the dealer; a municipal finance professional of the dealer; a political action committee controlled by either the dealer or a municipal financial professional of the dealer; a municipal advisor; a municipal advisor professional of the municipal advisor; or a political action committee controlled by either the municipal advisor or a municipal advisor professional of the municipal advisor. The only exception to the prohibition on municipal securities business or activities is for certain contributions made to officials of municipal entities by municipal finance professionals or municipal advisor professionals if these individuals are entitled to vote for such officials and provided any contributions by such individuals do not exceed, in total, $250 to each official, per election. The rule requires quarterly reporting to the MSRB by dealers and municipal advisors of certain information regarding political contributions and bond ballot contributions and municipal securities business and municipal securities activities engaged in during a reporting period.

Rule G-23 (Activities of Financial Advisors)

Prohibits dealers from serving as financial advisor and underwriter or placement agent on the same issue

Rule G-24 (Use of Ownership Information Obtained in Fiduciary or Agency Capacity)

Prohibits dealers from using non public information obtained in the course of certain fiduciary or agency capacities concerning the ownership of securities in furtherance of their business activities or for financial gain.

Rule G-21 (Advertising)

Prohibits false or misleading advertising concerning the facilities, services or skills of any dealer and establishes standards for advertisements of municipal fund securities; requires a municipal securities or general securities principal to approve in writing all advertisements prior to first use

Rule G-25 (Improper Use of Assets)

Prohibits the improper use of municipal securities or funds held on behalf of another person; guarantees against loss in customer accounts and transactions and sharing in profits and losses of customer accounts and transactions, by any broker, dealer or municipal securities dealer.

Rule G-31 (Reciprocal Dealings with Municipal Securities Investment Companies)

Prohibits the solicitation of transactions in municipal securities for an investment company account in return for sales by the dealer of shares or units in the investment company

What are the driving force behind a municipality paying back investors?

Property taxes and sales taxes. Traffic fined and licensing fees also help to this for municipalities.

Rule G-10 (Delivery of Investor Brochure)

Requires a dealer to deliver the investor brochure to a customer upon receipt of a written complaint concerning a municipal securities transaction from such customer.

Rule G-28 (Transactions with Employees and Partners of Other Municipal Securities Professionals)

Requires a dealer whose customer is an employee or partner of another dealer to give written notice of the opening and maintenance of any account for such a customer to the employer, to send the employing broker or dealer a duplicate copy of each confirmation sent to the customer and to act in accordance with any written instructions which may be provided by the employing dealer with respect to transactions effected with or for such an account

Rule G-17 (Conduct of Municipal Securities and Municipal Advisory Activities)

Requires dealers and municipal advisors to deal fairly with all persons with whom they conduct municipal securities business or municipal advisory business

Rule G-30 (Prices and Commissions)

Requires dealers to effect transactions in municipal securities with customers at fair and reasonable prices, if acting as principal, or for fair and reasonable commissions, if acting as agent, taking into account all relevant factors

Rule G-29 (Availability of Board Rules)

Requires dealers to keep a copy of the MSRB's rules in each office where municipal securities dealer activities are conducted, and to make the rules available for inspection by customers upon request.

Rule G-22 (Control Relationships)

Requires disclosure to customers of control relationships between a dealer and an issuer of municipal securities as well as persons other than issuers who are obligated with respect to debt service

Rule G-7 (Information Concerning Associated Persons)

Requires municipal securities brokers and municipal securities dealers to obtain information from their associated personnel concerning their qualifications to engage in municipal securities business; contemplates that this information will be filed with the appropriate regulatory agency

Rule G-15 (Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect to Transactions with Customers)

Requires municipal securities brokers and municipal securities dealers to provide customers with written confirmations of transactions, containing specified information; prescribes certain uniform practice procedures for dealers that transact municipal securities business with customers

Rule G-18 (Best Execution)

Requires municipal securities brokers and municipal securities dealers to use reasonable diligence to ascertain the best market for the subject security and buy or sell in that market so that the resultant price to the customer is as favorable as possible under prevailing market conditions

Rule G-6 (Fidelity Bonding Requirements)

Requires municipal securities brokers and municipal securities dealers, other than bank dealers, to meet the fidelity bonding requirements set by FINRA for dealers subject to their rules, as a prerequisite to qualification for purposes of MSRB Rule G-2 (Prohibits municipal securities brokers and municipal securities dealers from effecting transactions in municipal securities unless they and their associated personnel are qualified in accordance with MSRB rules)

Rule G-13 (Quotations Relating to Municipal Securities)

Requires quotations distributed or published by a dealer to represent bona fide bids or offers of municipal securities, based upon the dealer's best judgment of the fair market value of the securities; prohibits misrepresentation of another broker or dealer's quotations

Rule G-32 (Disclosures In Connection With Primary Offerings)

Requires underwriters in primary offerings to submit electronically to EMMA official statements, advance refunding documents and related primary market documents and information; permits dealers to satisfy their obligation to furnish official statements to purchasing customers by providing them with a link to EMMA, unless the customer requests a paper copy or it is an offering of a municipal fund security; requires underwriters to confirm the existence of a continuing disclosure agreement, report the identities of obligated persons in such agreement and provide the date by which annual financials are expected to be made available on EMMA; requires dealers in negotiated sales to furnish to customers certain information concerning underwriting arrangements

Municipal bonds

Securities that state governments, local governments, or U.S. territories issue. The municipality uses the money it borrows from investors to fund and support projects, such as roads, sewer systems, hospitals, etc. The interest that investors receive is exempt from some income taxes. In addition, ___ typically have lower yields than most other bonds, because the interest received on them are federally tax-free.

Rule G-16 (Periodic Compliance Examination)

Sets forth minimum scope and frequency of periodic compliance examinations of dealers by FINRA and bank regulators

Rule G-19 (Suitability of Recommendations and Transactions)

Sets standards for recommendations by dealers to customers of purchases, sales or exchanges of municipal securities

Build America Bonds (BABs)

Taxable municipal bonds that feature tax credits and/or federal subsidies for bondholders and state and local government bond issuers. ___ were introduced in 2009 as part of President Obama's American Recovery and Reinvestment Act to create jobs and stimulate the economy. ____ attempt to achieve this by lowering the cost of borrowing for state and local governments in financing new projects.

Advance refunding

The act or practice of a company issuing a second bond with a lower coupon rate in order to pay off a previously issued callable bond. In this circumstance, the callable bond is known as a prerefunded bond. Companies engage in ____ when more favorable interest rates become available, which reduces the company's overall borrowing costs.

Official notice of sale

The announcement of a new issue of a municipal bond. An issuer gives ___ when it seeks to attract underwriters to help it place the issue with investors. The ___ includes: - When and where bids can be submitted - The total amount of the sale - Amount of the good-faith deposit - The type of bond being offered (GO or revenue) - Methods for calculating cost (net interest cost or true interest cost) - The taxes backing the issue (issuers are more likely to aka bids for GO bonds because they are backed by taxes paid by people in the municipality; the winning bid has the lowest interest rate and/or the highest purchase price)

Unqualified legal opinion

The bond counsel (attorney) of a legal opinion is issuing a legal opinion without reservations.

Qualified legal opinion

The bond counsel (attorney) of a legal opinion that has some reservations about the issue.

Visible supply

The dollar amount of municipal bonds expected to reach the market within the next 30 days.

Auction rate

The interest rate that will be paid on a specific security as determined by the Dutch auction process. The auctions take place at periodic intervals, and the interest rate is fixed until the next auction is held. This is a good way for both the investor and the issuer to forecast their returns and costs, respectively, as the auctions can be held as often as annually or even weekly. The auction process also allows investors to mitigate reinvestment risk because the interest rate fluctuations are generally less volatile.

The placement ratio

The percentage of municipal bonds brought to market during the past week that have been sold by underwriters. Only issues greater or equal to $1 million are included in this calculation published by the Bond Buyer.

Legal opinion

The statement of a bond counsel (attorney) that a municipal bond issue is legal under the laws and restrictions of the issuing jurisdiction, and which indicates whether interest on the bonds is exempt from federal income taxes. A ___ is generally necessary to bring an issue to market.

Automated Customer Account Transfer (ACAT)

The transfer of securities from one account to another at a separate bank or brokerage. This may be done for any security or derivative: stocks, bonds, options, and futures may all be transferred via ___. However, each ____ occurs over the ___ System, which is only open to institutions eligible for membership in the National Securities Clearing Corporation and member banks of the Depository Trust Company.

Assessed valuation

The value of a property as determined by an appraisal conducted by a municipality. Such an ____ is important to investors in municipal bonds that are backed by property taxes.

Reoffering yields

The yield of a municipal bond if one buys it from an underwriter and holds it until maturity.

Taxable equivalent yield (TEY)

The yield of a taxable investment that equals the yield of a tax-free investment with a lower stated yield. A corporate bond yields less than its stated interest rate because of taxation, whereas a tax-exempt municipal bond does not. Thus, a municipal bond paying a lower interest rate will often net the bondholder more than a corporate bond with a slightly higher interest rate, depending upon one's tax bracket. The taxable equivalent yield is the extra yield required on a corporate bond to equal the yield of a municipal bond. ___ = municipal yield / 100% - investor's tax bracket Because the investor's tax bracket comes into play with municipal bonds, they are better suited for investors in higher tax brackets

Underwriters and conflict of interest

There are many potential conflicts of interest that may come into play when engaging in the underwriting of municipal securities. Some of these require only that they be disclosed. Other more potentially serious types of conflicts require that the underwriter take certain actions to ensure that purchasers of the securities are not adversely affected.

When-issued

Used to refer to a security that has not yet been issued but that will be issued in the future. Trading in ___ securities often occurs between the time a new security is announced (for example, the time when a stock is split) and the time the certificates are actually issued.

Controlling relationships

When the broker dealer controls, is controlled by, or is under common control with the issuer of the security. A ___ with respect to a municipal security does not necessarily exist if an associated person of a securities professional is a member of the governing body or acts as an officer of the issuer of the security.

Capital gain

When you sell an asset at a higher price than you paid for it, the difference is your ___. For example, if you buy 100 shares of stock for $20 a share and sell them for $30 a share, you realize a capital gain of $10 a share, or $1,000 in total.

Capital loss

When you sell an asset for less than you paid for it, the difference between the two prices is your ___. For example, if you buy 100 shares of stock at $30 a share and sell when the price has dropped to $20 a share, you will realize a capital loss of $10 a share, or $1,000.

Special tax bonds

a municipal bond secured by one or more taxes other than property taxes. The bonds may be backed by sales taxes on fuel, tobacco, alcohol, etc.

General obligation (GO) bonds

a municipal bond that funds nonrevenue producing facilities (e.g., schools, police departments), are backed by the taxes of the people living in the municipality, and require voter approval from the individuals living in the municipality. They usually have higher ratings and lower yields than revenue bonds.

Political contributions

a rule banning financial professionals or firms from doing business with issuers for two years after making certain contributions to issuer officials other than small permissible ones. The exception is that municipal finance professionals (MFPs) may make a contribution of $250.00 per election to issuer officials for whom they are permitted to vote.

Advance (pre-funded) municipal bond

a type of bond issued to fund another callable bond, where the issuer actually decides to exercise its right to buy its bonds back before the scheduled maturity date. The proceeds from the issue of the lower yield and/or longer maturing ____ will usually be invested in Treasury bills (T-bills) until the scheduled call date of the original bond issue occurs. For example, suppose that in June 2006, XYZ Corp decided to call its 9% callable bond (originally set to mature in 2009) for $1,100 on its first call date of January 2007. In July, XYZ Corp issued a new bond yielding 7% and took all the proceeds from that bond and invested them into T-bills -- ensuring that enough money would be available to retire the issue come January. Using ___ can be a good method for companies to refinance their older issue bonds when interest rates drop.

Certificates of participation

a type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues. The authority usually uses the proceeds to construct a facility that is leased to the municipality, releasing the municipality from restrictions on the amount of debt that they can incur.

Debt service coverage ratio

an indication of the ability of a municipal issuer to meet the debt service payments on its bonds. The higher the ____, the more likely the issuer is to be able to meet interest and principal payments on time. ___ = net OR gross revenues / principal + interest If a Series 7 question doesn't specifically ask for gross revenues or net revenues, you can assume net because that's the more common way that a municipality pays off its debt.

Variable rate

an interest rate on a security that fluctuates over time, because it is based on an underlying benchmark interest rate or index that changes periodically. The obvious advantage of a ___ is that if the underlying interest rate or index declines, the borrower's interest payments also fall. Conversely, if the underlying index rises, interest payments increase.

Debt per capita (per person)

the debt of a municipality (overall, direct, or overlapping) divided by the number of people in that municipality gives...

Municipal equivalent yield (MEY)

the yield on a taxable bond after paying taxes. Once I have this yield, I can compare it to a municipal bond to help determine the best investment for one of my customers. ___ = municipal yield x (100% - investor's tax bracket)