Online Exam 2

A municipal advisor must pay an initial registration fee to the MSRB of:

$1,000 Each member must pay a $1,000 initial registration fee to the MSRB prior to conducting municipal securities business. The MSRB's annual registration fee is also $1,000.

A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by:

$1.25 per $1,000 par value Treasury bonds are quoted in 32nds of a point, and are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, so 4/32 or 1/8 of a point equals $1.25.

A $100,000 municipal bond with a 4% coupon rate is being quoted by a dealer at 101 3/4. If the number of days of accrued interest since the last coupon is 85, what is the bond's clean price?

$101,750 The term clean price of a bond refers to its quoted price, which does not include accrued interest. The dirty price of a bond includes the accrued interest and is the actual cost of the bond to the investor. A $100,000 face value bond quoted at 101 3/4 is equal to $101,750 (101.75% of $100,000)—the clean price. The accrued interest is found by taking the coupon amount of $4,000 ($100,000 x 4%) and multiplying it by the days of accrued interest divided by the number of days in a 360-day year (85/360), which equals $944. The dirty price is equal to $102,694 ($101,750 + $944)

A municipality issues $300,000,000 of bonds for the benefit of a private entity. In order for the bonds to be considered a qualified private activity bond, what amount must be used for a qualified purpose?

$285,000,000 For a private activity bond to be tax-exempt, at least 95% or more of the net bond proceeds must be used for one of the several qualified purposes as defined by the IRS. 95% of $300,000,000 is $285,000,000. The term qualified private activity bond refers to a tax-exempt bond where the interest is federally taxable only to investors subject to the alternative minimum tax.

An investor in the 28% tax bracket purchases a municipal bond with a 7.2% tax free yield. What fully taxable return must the investor receive on a corporate bond to receive the same after tax return?

10% To find the fully taxable return needed on the corporate bond, the tax equivalent yield for the municipal bond must be calculated -This is found by dividing the tax-free return by the complement of the tax bracket [7.2% tax-free return/ (100% - 28% tax bracket)] =[7.2% / 72%]= 10% If the investor buys a corporate bond yielding 10%, the investor will be left with 7.2% after paying taxes at a 28% rate

An individual in the 28% tax bracket can obtain a taxable yield of 9% from a corporate bond. What tax-free yield must the individual receive from a municipal bond to equal the after-tax return from the corporate bond?

6.5% To determine the net yield (after tax) on a taxable bond, multiply the taxable yield (9%) by the complement of the tax bracket (100% - 28% = 72%). 9% x 72% = 6.5%.

A state issues debt to build a new student center for a local college. The college leases the building from the state, and these lease payments are used to pay interest and principal on the bond. This type of bond is called a(n):

A lease rental bond -A lease rental bond is issued when one municipality wants to lease a facility from another municipality -Education bonds are issued for student loans housing bonds are issued to help finance single-family or multifamily housing, usually for low or moderate income families.

A state agency issues a bond in order to construct a dormitory for a public university. The interest on the bonds is not subject to federal income tax and the credit rating is determined by the financial health of the public university. This is an example of

A qualified 501(c)(3) bond -Under IRS guidelines, a 501(c)(3) organization is a not-for-profit entity such as an educational, charitable, or religious entity -Examples include a not-for-profit retirement community or a low-income housing project, a not-for-profit college or university, and a hospital owned by a religious organization -The interest on the bonds is not subject to federal income tax nor the alternative minimum tax -The credit rating is based on the financial health of the public university, not the state agency issuing the bonds.

Which of the following would be considered a violation of antifraud rules in connection with an offering of new municipal securities? A. A firm does not disclose that it has a financial interest in the offering B. A firm does not allocate bonds to a customer who submitted a group order C. A firm does not disclose the concession to one of its customers D. Antifraud rules do not apply to a new issue of municipal bonds since they are exempt securities under the Securities Act of 1933

A. A firm does not disclose that it has a financial interest in the offering A municipal securities firm that has a financial interest in an offering that it sells to a customer has a conflict of interest. Failure to disclose this would be fraudulent. However, a firm is not required to disclose the concession it will earn from a sale to a customer. If an issue is oversubscribed, not all customers will receive bonds, so a group order may not be filled. Securities that are exempt under the '33 Act are exempt from its registration requirements, not from its antifraud provisions.

All of the following are positive factors for the municipal bond market, EXCEPT: A. An effort by the federal government to reduce the deficit B. An increase in the flow of funds to municipal bond funds C. Investors are waiting for issuers to offer debt in anticipation of infrastructure projects being approved D. The yield on municipal securities is higher than on Treasury securities

A. An effort by the federal government to reduce the deficit An important factor in both the primary and secondary market for municipal bonds is demand for these securities. An increase in demand would make it easier and less costly for the issuers of municipal securities. An increase in the flow of funds into municipal bond funds would be a positive factor since as they have additional cash to invest. An increase in outflows would be a negative since the funds may need to sell securities in order to pay their investors who are redeeming shares of the fund. Regarding the difference between the yield on municipal bonds and Treasury securities, the narrower the difference, the stronger the demand for municipal securities. The yield curve is based on Treasury securities and, if municipal securities are trading at yields that are higher than Treasuries, municipal bonds may become more attractive to investors and this would increase the demand for municipal securities. Demand would also increase if investors are waiting for issuers to offer debt in anticipation of infrastructure projects being approved. An effort by the federal government to reduce the deficit would be a negative factor for the municipal bond market because a reduction in funds from the federal government may lead to less money available to municipalities from the federal government.

Which of the following actions by a municipal securities representative would NOT be permitted? A. Giving a client several gift cards valued at $60 each B. Taking several clients to dinner valued at $260 C. Giving a client two tickets valued at $40 each D. Taking a client to a sporting event that costs $230 in total

A. Giving a client several gift cards valued at $60 each The MSRB has set a limit of $100 per year for gifts given in connection with the business of the employer of the recipient. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, and expenses related to legitimate business travel. In order for the activity to be considered an expense, the RR must attend the event. Since more than one $60 gift card was given to the client, this would exceed the $100 gift limit

All of the following items should be disclosed in a summary of derivative activity, EXCEPT the: A. Initial value of derivatives reclassified as investments B. Changes in fair value during the reporting period C. Separate categories for hedging and investment derivatives D. Notional amounts for all hedging and investment derivatives

A. Initial value of derivatives reclassified as investments The summary information provided for derivatives focuses on fair value and any changes to that fair value. Information should be categorized based on governmental activities, types of derivatives, and hedging versus investment derivatives. Notional amounts covered by each derivative should also be included in the summary.

When computing coverage for revenue bonds, the ratio used is: A. Net revenues to debt service B. Gross revenues to operating expenses C. Gross revenues to annual interest payments D. Net revenues to operating expenses

A. Net revenues to debt service -Coverage for revenue bonds is a ratio used to determine a municipality's ability to pay its yearly debt service on its outstanding debt. The formula is: Net Revenues / Debt Service -Net revenues are gross revenues minus operating expenses

An underwriter may: A. Not recommend that the issuer not retain a municipal advisor B. Recommend that the issuer not retain a municipal advisor in a competitive underwriting C. Recommend that the issuer not retain a municipal advisor in a negotiated underwriting D. Recommend that the issuer use an underwriter that is affiliated with the municipal advisor

A. Not recommend that the issuer not retain a municipal advisor An underwriter may not discourage an issuer from using a municipal advisor, or otherwise imply that the hiring of a municipal advisor would be redundant, because the underwriter can provide the same services that a municipal advisor would. The type of underwriting would not be relevant, and recommending that the issuer use an underwriter that is affiliated with the municipal advisor would be a conflict of interest.

An employee of a municipality is providing advice on an upcoming issue of municipal bonds. This individual is: A. Not required to be registered as a municipal advisor B. Required to be registered as a municipal advisor C. Considered a municipal advisor but not required to be registered D. Violating the SEC's antifraud provision

A. Not required to be registered as a municipal advisor Employees of municipalities and obligated persons who provide advice concerning an issue of municipal securities acting within the scope of their employment are not required to register as a municipal advisor (MA).

Which of the following would best describe the condition indicative of a catastrophe call feature? A. Relating to acts of God or eminent domain, which are beyond the control of the issuer of the securities B. Relating to periods of runaway inflation and the resulting high interest rates which devastate bond prices C. Relating to personal hardship on the part of an investor who has purchased municipal securities, but is financially unable to pay for them D. Relating to an issuer being unable to pay interest on time due to either declining tax rolls or a project which is underutilized

A. Relating to acts of God or eminent domain, which are beyond the control of the issuer of the securities A catastrophe call results from something that occurs which is beyond the control of the issuer (e.g., a hurricane or a fire). This occurrence would in some way impair the issuer's ability to pay interest or principal on the bond. In any case, a catastrophe call feature would mandate that the issuer redeem the issue within a stated period, often with proceeds from an insurance policy that covered the disaster.

The additional bonds test would be used by a municipality with outstanding debt to determine whether: A. Revenue from a project is sufficient to cover debt service prior to a new issue of bonds B. Revenue from a project is sufficient to cover debt service after a new issue of bonds C. Current tax receipts permit the issuance of a new issue of bonds D. The municipality can use bonds without requiring voter approval

A. Revenue from a project is sufficient to cover debt service prior to a new issue of bonds The additional bonds test is a requirement in many bond indentures requiring a financial test prior to issuing new bonds. The test is done to make sure revenue is sufficient to make payments on the debt service of both the existing and proposed bond issues

The main objective of a floating-to-fixed rate swap is to enable a municipality: A. That has issued variable-rate debt to make its payments based on a fixed rate B. That has issued fixed-rate debt to make its payments based on a floating rate C. To hedge against a decline in interest rates D. To hedge against a change in the issuer's credit risk

A. That has issued variable-rate debt to make its payments based on a fixed rate An interest-rate swap is a situation where two parties enter into a contract to exchange cash flows based on two interest rates—one based on a fixed rate, known as the swap rate, and the other based on a variable or floating rate, such as LIBOR. The two parties to a swap are the issuer (the municipality) and the financial institution (such as a bank). A floating-to-fixed rate swap is a situation where the municipality has issued a floating-rate security and is concerned that interest rates may rise (not decline). So, municipality enters into a floating-to-fixed rate swap with a swap dealer in which it will pay a fixed rate and receive a floating rate. The main objective of this type of swap is to enable a municipality that has issued variable-rate debt to make its payments based on a fixed rate.

Which of the following describes an unqualified opinion? A. The auditor finds the financial statements are presented fairly in accordance with GAAP B. The auditor finds a departure from GAAP in the financial statements C. The auditor finds the financial statements are not presented fairly in accordance with GAAP D. The auditor cannot express an opinion on one or more parts of the financial statements

A. The auditor finds the financial statements are presented fairly in accordance with GAAP An unqualified or clean opinion is one stating that financial statements are presented fairly in accordance with GAAP. An qualified opinion states that there are departures from GAAP in the financial statements. An adverse opinion states that financial statements are not presented fairly in accordance with GAAP. A disclaimer of opinion is given when an auditor cannot express an opinion on one or more parts of the financial statements.

If interest rates increase, what will happen to the discount rate and liabilities of a pension fund? A. The discount rate increases and the present value of pension fund liabilities decreases B. The discount rate increases and the present value of pension fund liabilities increases C. The discount rate decreases and the present value of pension fund liabilities decreases D. The discount rate decreases and the present value of pension fund liabilities increases

A. The discount rate increases and the present value of pension fund liabilities decreases If interest rates increase, the pension fund would be expected to apply a higher discount rate for the present value of the fund's liabilities. The present value calculation is based on dividing the liabilities by (1.0 + discount rate). Therefore, the higher the discount rate, the lower the present value of the fund's long-term liabilities.

Municipal bond issuers will have their bonds rated: A. To improve the marketability of the bonds B. Since it is required by most state and local governments C. Since this will increase the amount of capital that may be raised D. Since the cost is paid by the underwriter

A. To improve the marketability of the bonds There is no legal requirement to rate municipal bonds, but most issuers may obtain a rating since it will improve marketability as contrasted with non-rated bonds. The cost of the rating is paid by the issuer.

Which of the following statistics should be included in supporting information (SI) related to demographics and economics? A. Total population for the past 10 years B. Total personal income for the past 7 years C. Per capita income for the past 5 years D. The unemployment rate for the past 3 years

A. Total population for the past 10 years The statistical section of a municipality's CAFR should include at least two SI schedules that contain demographic and economic information. One schedule should include the following pieces of information. Population Total personal income Per capita personal income Unemployment rate All information should cover at least the past 10 years. In addition, a government should also present a schedule of the 10 largest employers over the past 10 years.

Arrange in order the following S&P bond ratings, starting from the HIGHEST rating. AA- A+ BBB BB+

AA-, A+, BBB, B+ Fitch and S&P both have similar ratings. From highest to lowest is: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- in the investment-grade category. In addition, both have BB+, CCC+, CCC, CCC-, CC, C, and D in the speculative-grade category.

A city wants to fund the construction of a water and sewer system. It plans on obtaining long-term financing to pay for the cost of the project and wants to start construction immediately. If current interest rates are high and expected to drop, the municipal advisor would recommend which of the following? A. Private activity bonds B. A bond anticipation note C. A revenue anticipation note D. A tax anticipation note

B. A bond anticipation note If interest rates are expected to drop, the issuer would not want to issue long-term bonds. By issuing a bond anticipation note, the city could start construction on the project and pay off the notes within a year or two by issuing a long-term bond when rates have declined. Revenue anticipation notes are issued in anticipation of receiving revenue (usually from the federal or state government) and tax anticipation notes are issued in anticipation of receiving tax receipts in the near future.

Which of the following entities typically sponsors a 529 plan? A. An employer B. A state C. A mutual fund complex D. A broker-dealer

B. A state Although 529 education savings plans are often administered by a third-party vendor such as a mutual fund family, these plans typically are sponsored by a given state. For example, New Jersey sponsors a 529 plan and New York sponsors its own. Investors are permitted to purchase 529 plans from states other than their own state of residence.

What is the purpose of a TEFRA hearing? A. Allow underwriters to review TEFRA documentation B. Allow community members to express their opinions on a bond issue C. Determine whether IRS rules are being followed D. Determine whether potential underwriters are suitable for a particular issue

B. Allow community members to express their opinions on a bond issue A TEFRA hearing is mandated by the IRS to provide the opportunity for interested individuals to express their views on the issuance of private activity bonds or the nature of the projects that will be funded by the bonds.

A municipality selling a refunding issue would need all of the following, EXCEPT: A. An official statement B. An additional bond covenant C. A legal opinion D. A trustee

B. An additional bond covenant An additional bond covenant or test is done to make sure revenue is sufficient to make payments on the debt service of both the existing and proposed bond issues. Since the new debt would be replacing existing debt with a higher interest rate, there is no requirement for an additional bonds test. In most cases, the amount of overall debt service would decline.

In a negotiated sale, the presale period ends upon: A. Execution of a contract to sell the securities to the public B. Execution of a contract to sell the securities to institutional clients C. Execution of a contract to purchase the securities from the issuer D. None of the above

B. Execution of a contract to sell the securities to institutional clients In a negotiated sale, the end of the presale period occurs at the time of execution of a contract to purchase the securities from the issuer.

A state intends to issue bonds and use the proceeds to purchase computers, software, and telecommunications equipment for its employees and use an annual appropriation to pay the debt service. What type of bonds would be issued? A. General obligation bonds B. Lease rental revenue bonds C. Special tax bonds D. Special assessment bonds

B. Lease rental revenue bonds Both lease rental revenue bonds and certificates of participation use an annual appropriation to pay the debt service. In both cases, the equipment that is purchased with the bond proceeds could be cars and trucks, computers and software, office equipment, and telecommunication equipment. A general obligation bond is backed by taxes, not an annual appropriation to pay the debt service. The other bond choices are not issued to purchase or rent equipment.

The underwriter has not submitted an official statement to the Electronic Municipal Market Access (EMMA) system by the closing date. The underwriter is required to: A. Submit to EMMA a notice that the official statement will be sent directly to any purchaser but will not be submitted to the system B. Submit to EMMA a notice that the official statement has not been submitted and that the official statement will be submitted when its becomes available C. Submit to EMMA a notice that the official statement has not been submitted and that the official statement will be submitted with one business day from the closing date D. Cease offering the securities to any investors until the official statement becomes available

B. Submit to EMMA a notice that the official statement has not been submitted and that the official statement will be submitted when its becomes available The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary market disclosure service for official statements, other related primary market documents, and information. Under MSRB Rule G-32, the underwriter of a primary offering (new issue) of municipal securities is required to provide an official statement for that offering within one business day after the receipt of the official statement from the issuer or its designee. If the official statement for the offering has not be submitted by the underwriter (due to the fact the underwriter has not received it from the issuer), the underwriter is required to submit to EMMA a notice that the official statement has not been submitted and that the official statement will be submitted when its becomes available, submit the official statement within one business day after receipt from the issuer, and submit either a preliminary official statement or a notice that no preliminary official statement has been prepared. The underwriter does not need to cease offering the securities.

When calculating the net interest cost for a competitive bid, how would a premium be treated? It is: A. Added to the interest the issuer will pay B. Subtracted from the interest the issuer will pay C. Not taken into account D. Only used in true interest cost calculations

B. Subtracted from the interest the issuer will pay When calculating the net interest cost, premiums (amount paid to the issuer above the issue's par value) are subtracted from the total interest the issuer will pay over the life of the issue. Discounts would be added to the total interest.

A municipality with general taxing power may avoid the IRS arbitrage rebate requirements if: A. The amount of bonds issued does not exceed $5,000,000 during a two-year period B. The amount of bonds issued does not exceed $5,000,000 during a one-year period C. The amount of interest paid on the bonds does not exceed $1,000,000 over the life of the issue D. The amount of interest earned on the invested funds does not exceed $1,000,000 over the life of the issue

B. The amount of bonds issued does not exceed $5,000,000 during a one-year period The term arbitrage rebate refers to the amount paid to the federal government by a municipal issuer on the material difference between the interest received by investing the proceeds of a municipal bond that exceeded the interest paid by the issuer on these bonds. One of the exceptions is a smaller issuer exception, which is defined as a municipality with general taxing power that issues $5,000,000 of bonds or less during a one-year period.

All of the following statements are TRUE regarding yield curves, EXCEPT: A. In an ascending curve, short-term rates are lower than long-term rates B. They are fixed and may only be changed by the Federal Reserve Board C. In a descending curve, short-term rates are greater than long-term rates D. In a flat yield curve, both short-term and long-term rates are equal

B. They are fixed and may only be changed by the Federal Reserve Board -Yield curves are ascending (upward sloping from the shorter to longer maturities) when money is easy > When this occurs, short-term rates are lower than long-term rates. -A descending yield curve, which is indicative of a tight money situation > shows short-term rates higher than long-term rates -A flat yield curve indicates that short-term and long-term rates are approximately the same -FRB policies may influence yield curves, but they are not fixed and are influenced by a variety of factors.

The proceeds of an advance refunding issue are usually invested in: A. Other municipal bonds or notes B. U.S. Treasury or federal agency securities C. Corporate bonds D. Large-cap equities

B. U.S. Treasury or federal agency securities The issuer will invest the proceeds in U.S. Treasury or agency securities. The goal is to attain maximum safety of principal while fulfilling the debt service obligations (principal and interest) associated with the refunded securities.

A municipal securities dealer can rely on the underwriting exclusion and not be required to register as a municipal advisor if it provides advice to an issuer: A. Only when the advice occurs after the underwriter has sold the securities to the public B. When the advice occurs prior to the time the underwriter has any unsold balance of securities for sale to the public C. Within 25 days after the official statement is available on EMMA D. Later than 25 days after the official statement is available on EMMA

B. When the advice occurs prior to the time the underwriter has any unsold balance of securities for sale to the public The SEC has stated that the underwriting exclusion from being considered a municipal advisor terminates at the end of the underwriting period as defined under SEC Rule 15c2-12. The end of the underwriting period is defined as the later of the closing of the underwriting or the sale of the last of the securities by the syndicate. The mention of 25 days refers to a different section of this SEC rule and refers to the delivery of an official statement by a dealer to a customer upon request for 25 days following the end of the underwriting period.

In an analysis of the credit condition of a GO municipal bond, which trend is unfavorable? A. A decrease in the general fund deficit B. An increase in per capita income C. A decrease in assessed valuation for the municipality D. An increase in population

C. A decrease in assessed valuation for the municipality GO (general obligation) municipal bonds are backed by the full faith, credit, and taxing power of the municipality. A decrease in assessed valuation signifies a decrease in property values which, in turn, would indicate a decrease in property taxes collected. This would erode the municipality's tax base and its ability to pay its debts.

Which of the following statements is TRUE concerning an auditor's opinion? A. A government in good financial condition will always receive an unqualified opinion B. Supporting information (SI) is generally included in the scope of an audit C. A less stringent standard is applied to required supporting information (RSI) D. A government in poor financial condition will always receive a qualified opinion

C. A less stringent standard is applied to required supporting information (RSI) Auditors apply a less stringent approach to RSI than that which is applied to financial statements and notes to those statements. Supporting information (SI) that is not required does not fall under the scope of an audit.

All of the following statements are TRUE concerning a letter of credit and a standby bond purchase agreement, EXCEPT: A. A letter of credit contains an unconditional obligation by a financial institution to pay interest and principal B. A standby bond purchase agreement usually contains a termination event clause C. A letter of credit allows a financial institution to wait and purchase bonds only if the securities that were tendered cannot be remarketed within a certain period D. A standby bond purchase agreement is used as a liquidity provider related to a VRDO to purchase securities that cannot be remarketed immediately to investors

C. A letter of credit allows a financial institution to wait and purchase bonds only if the securities that were tendered cannot be remarketed within a certain period A letter of credit (LOC) is issued by a financial institution (usually a bank) as a form of credit enhancement or as a liquidity provider. It can provide credit enhancement if under certain conditions the bank is required to pay interest and principal in the event the issuer is unable to do so. A LOC may also be used as a liquidity provider related to variable-rate demand obligations (VRDOs), where the financial institution agrees to purchase securities that cannot be remarketed immediately to investors. A standby bond purchase agreement (SBPA) is also used as a liquidity provider related to a VRDO to purchase securities that cannot be remarketed immediately to investors, but is not an unconditional obligation to purchase the securities and would not guarantee payment of interest and principal. It is important to remember that credit enhancement (a financial institution making payments on behalf of an issuer) is different from a liquidity facility or provider, which agrees to buy bonds that are put or sold back to an issuer or remarketing agent. An important distinction is that a LOC is an unconditional obligation that requires the financial institution to make payments, whereas an SBPA is conditional and used only if the securities that were tendered cannot be remarketed within a certain period. Standby bond purchase agreements also contain termination events that, if triggered, would release the financial institution or the issuer from being obligated under the agreement. For that reason, VRDOs with an SBPA have termination risk that would require the holders to own the bonds until maturity

A fairness opinion would be most likely prepared by which of the following? A. A feasibility consultant B. A placement agent C. A pricing consultant D. An investment adviser

C. A pricing consultant A pricing consultant will issue a fairness opinion in a negotiated underwriting to state the price paid by the underwriter to the municipal issuer is fair. It is a type financial advice rendered by a type of municipal advisor.

Which of the following is NOT an information source for municipal bonds in the primary market? A. EMMA B. The Wall Street Journal C. Alternative trading systems D. New-issue wires

C. Alternative trading systems Information sources for municipal bonds in the primary market include the following: the Notice of Sale, an official statement, issuers or financial advisors, the Electronic Municipal Market Access (EMMA) system, print or electronic news services (The Wall Street Journal), and new-issue wires. An alternative trading system would provide information on secondary market trading of municipal bonds.

Regarding the flow of funds, the account into which money will be deposited for expansion of the facility is the: A. Operation and maintenance fund B. Replacement and renewal fund C. Construction fund D. Debt service fund

C. Construction fund Money is allocated to the construction fund (also called a product fund) in order to pay for future construction.

Issuers of tax-exempt government obligations may be required to file which of the following with the IRS? A. Form 1040 B. A Schedule K-1 C. Form 8038 D. Form 6251

C. Form 8038 Issuers of tax-exempt government obligations may be required to file Form 8038 with the IRS. The various 8038 forms are filed by municipal issuers of private activity bonds and issuers that may be subject to IRS rules regarding Treasury arbitrage. Form 6251 is filed by individuals when calculating their alternative minimum tax.

A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: A. Interest rates are stable B. Interest rates are rising C. Interest rates are falling D. The yield curve slopes downward

C. Interest rates are falling If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

A municipal issuer that is using an independent registered municipal advisor to provide advice on a municipal financial product is also using your firm's services to provide advice on the same issue. Your firm: A. Is required to be registered as a municipal advisor B. Is required to register as an investment adviser C. Is not required to register as a municipal advisor D. Is required to register with the MSRB

C. Is not required to register as a municipal advisor People or firms providing advice about a particular transaction or deal, for which the municipality or obligated person has engaged an independent registered municipal advisor (IRMA) do not need to register themselves. The idea is that since the municipality or obligated person already has someone to protect its interest, it should be able to get advice from other parties who do not need to register. In order to use this exemption, the following three conditions must be satisfied. 1) The IRMA must be a registered municipal advisor and the person using the exemption may not have been associated with the IRMA for at least the last two years (not 12 months) 2) The municipality or obligated entity states in writing that it has engaged an IRMA and will be relying on its advice. The person seeking to use the exemption must be able to reasonably rely on this written representation (i.e., not have any reason to doubt its authenticity). 3) The person using the exemption must give the municipality written disclosure that it is not a registered municipal advisor and does not have a fiduciary duty to the municipality, the way a registered adviser does under the Exchange Act > The IRMA must receive a copy of this document and the municipality must have reasonable time to evaluate the information and any conflicts of interest that the person using the exemption might

A municipality that allocates payment of a bond issue in which the combined annual payments of interest and principal are the same has a: A. Crossover refunding B. Net revenue pledge C. Level debt service D. Level principal

C. Level debt service A level debt service is a situation where the combined annual amount of interest and principal payments, remain relatively the same over the life of the issue of bonds. A level principal is a situation where the debt service payments have the same amount of principal payments over the life of the issue.

The amount of new issues sold, compared to those offered for sale, as of the close of business each Friday is reported in the The Bond Buyer's: A. Visible supply B. 20-Bond Index C. Placement ratio D. Notices of sale

C. Placement ratio The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors. The visible supply is the total par value of all negotiated and competitive issues scheduled to come to market during the next 30 days. The 20-Bond Index is the average yield on 20 selected municipal bonds.

Interest earned on which of the following bonds would be added to income when calculating the alternative minimum tax? A. Limited tax bonds B. School bonds C. Private activity bonds D. Public housing bonds

C. Private activity bonds The computation of the alternative minimum tax involves adding tax preference items back to a taxpayer's income. In some cases, interest earned on a private activity bond may be considered a tax preference item. A private activity bond, also called an AMT bond, is a municipal bond with more than 10% of the proceeds generated from the bond going to a project financed by a private entity (e.g., a corporation).

Under IRS rules, all of the following records must be kept by an issuer of tax-exempt bonds, EXCEPT: A. Documentation related to the sources of payments or security for the bonds B. Records related to each bond transaction C. Records of the names of bondholders who purchased the new issue D. Documentation pertaining to any investment of bond proceeds

C. Records of the names of bondholders who purchased the new issue The IRS requires issuers of tax-exempt bonds to maintain certain records primarily related to the tax treatment of the issuer. Although the specific records are based on the type of securities that were issued, a general list includes the following. Documentation related to the sources of payments or security for the bonds Records related to each bond transaction (such as the loan agreement, bond counsel opinion, and trust indenture) Documentation pertaining to any investment of bond proceeds, which might include SLGS investments or GICs, actual investment income received from bond proceeds, and rebate calculations Documentation evidencing the expenditures of bond proceeds Documentation evidencing the use of bond-financed property by public and private sources, e.g., a contract between the issuer and a conduit borrower There is no requirement to keep a record of the names of bondholders who purchased the new issue.

Which of the following is NOT used to determine the winning bid in a competitive bond offering? A. Bond years B. NIC C. Reoffering Yields D. TIC

C. Reoffering Yields Reoffering yields are based on the price paid by purchasers and are not a part of the underwriter's bid. Bond years are calculated by multiplying the number of $1,000 par value bonds by the years to maturity. When the bond years of each maturity are multiplied by the respective coupon rate and then totaled, the result is the net interest cost for this issue. NIC and TIC are used to determine the cost of the bid to the issuer.

Which of the following is NOT a function of the Federal Reserve Board? A. Implementing discount rate changes B. Adjusting reserve requirements C. Setting fiscal policy D. Establishing a range for fed funds

C. Setting fiscal policy

An analysis of the quality of a general obligation bond to be issued would include all of the following, EXCEPT: A. The tax base of the community B. The economic character of the community C. The dollar denominations of the bonds to be issued D. The makeup of the population of the community

C. The dollar denominations of the bonds to be issued An analysis of the quality of a general obligation bond to be issued would include all of the following except the dollar denominations of the bonds to be issued.

A municipality may be required to issue bonds at a higher rate under which of the following conditions? A. The municipality's employment rate is increasing at a faster rate than the national rate B. The municipality's number of building permits is increasing at a faster rate than the national rate C. The municipality's gross domestic product is declining at a faster rate than the national rate D. The municipality's personal income growth rate is declining at a faster rate than the national rate

C. The municipality's gross domestic product is declining at a faster rate than the national rate State and local economic indicators are very important when a municipality prices its bond issues. The stronger its financial condition, the better the credit quality, which would lead to the ability to offer bonds at a lower rate. Increasing income levels, GDP, construction, building permits, and employment rates that lead to higher tax income are all positive factors. Increasing unemployment rates and declining GDP are a negative factor.

An article in the Daily Bond Buyer states that the placement ratio rose to 91.5%, up from 78.7% a week ago. 26 new issues, totaling $636.5 million, were brought to the market by major syndicates and $582.6 million reportedly was sold. Based upon this information, which of the following statements best describes the placement ratio? A. The ratio between deals which have been announced previously and those which have already come to market B. The ratio between deals which have come to market and those which still remain on the calendar C. The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale D. The percentage of bonds awaiting sale to the public compared to those that will be underwritten in the next 30 days

C. The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale The placement ratio is a means of gauging the amount of bonds which have recently been underwritten on a new issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds are moving into the hands of the investors.

A municipal bond backed by an insurance company has gone into default. The insurance carrier will provide: A. Immediate payment of interest and principal B. Principal payment at maturity only C. Timely payment of principal and interest D. Accelerated principal only

C. Timely payment of principal and interest -Municipal bond insurance guarantees the timely payment of principal and interest -If a municipal bond has 10 years to maturity, the insurance company is obligated to make 20 interest payments as they come due and a lump sum at maturity.

All of the following statements concerning a municipal advisor that engages with a client are TRUE, EXCEPT: A. A municipal advisor must always act in the best interest of its client B. A municipal advisor may limit the advisory services it will provide C. Under certain circumstances, the Duty of Loyalty may be limited D. All material conflicts of interest must be managed or mitigated

C. Under certain circumstances, the Duty of Loyalty may be limited Under it's Duty of Loyalty, a municipal advisor must deal honestly and with utmost good faith when engaging in advisory activities with a client. This requires the advisor to always act in the client's best interest. Although an advisor may limit the scope of advice it may engage in, the standards of conduct may not be limited. An advisor is precluded from entering into an advisory relationship if its material conflicts of interest cannot be managed or mitigated

An increase in which of the following would NOT be a positive sign when evaluating the credit rating of a general obligation municipal bond? A. Tax rates B. Building permits C. Unfunded pension liabilities D. Assessed valuation

C. Unfunded pension liabilities An increase in tax rates, building permits, and assessed valuation would signal an increase in the amount of tax receipts that a G.O. bond issuer would receive and would have a positive effect on its credit rating. However, an increase in unfunded pension liabilities would have a negative effect on the credit rating of a G.O. issuer.

A municipality has issued short-term notes to finance the construction of a project. The notes will mature in 60 days and the municipality plans on issuing long-term bonds to pay off the notes. This bond offering is an example of:

Current refunding The term current refunding refers to a bond issue that is issued not more than 90 days before the final payment of principal and interest. If the refunding issue is issued more than 90 days before the final payment of principal and interest, it is referred to as an advance refunding issue. Since the notes will be paid off in 60 days, this is an example of current refunding.

Which of the following securities offers an investor the highest yield? A. A Treasury bond B. A general obligation bond C. A revenue bond D. A taxable municipal bond

D. A taxable municipal bond Due to the federal tax exemption available on most municipal securities, their yield is lower than comparable, but higher-quality Treasury bonds. The yield on a general obligation bond (i.e., a bond backed by the taxing power of the issuer) is lower than the yield on a revenue bond. A taxable municipal bond will have a higher yield than a Treasury bond because both securities are subject to federal income tax, but the taxable municipal bond has a higher degree of credit risk. A municipal issuer will sell a taxable municipal bond to raise funds for a purpose that the federal government will not subsidize. Examples of these offerings include bonds issued to build a sports facility, fund a pension plan, or certain refunding issues. A Build America Bond (BAB) is also a type of taxable municipal bond.

Which of the following municipal bonds will have the longest duration? A. A 3.50% bond maturing in 10 years B. A zero coupon bond maturing in 10 years C. A 3.50% bond maturing in 20 years D. A zero-coupon bond maturing in 20 years

D. A zero-coupon bond maturing in 20 years Duration measures the time it takes for invested funds to be returned and is measured in terms of years. The longer the period, the greater the bond's risk due to changing interest rates. Two main factors that help to determine a bond's duration are (1) the time to maturity, and (2) the coupon rate. A bond with a short maturity will repay the investor sooner than a bond with a long maturity. Also, a bond with a high coupon will repay an investor sooner than a bond with a low coupon. Therefore, bonds that have longer maturities and/or lower coupon rates will have greater/longer durations. A zero-coupon bond will have a duration that is equal to its maturity and will have a longer duration than a bond that pays a coupon and matures in the same number of years.

All of the following are required continuing disclosures by an issuer or obligated person, EXCEPT: A. Audited financial statements for state or local government, or other obligated persons B. Substitution of credit or liquidity providers C. Merger, acquisition, or sale of all the issuer assets D. An increase or decrease of greater than 5% in the issuer's tax base

D. An increase or decrease of greater than 5% in the issuer's tax base SEC Rule 15c2-12 requires the dealer underwriting the bonds to make sure the issuer will provide certain information on an ongoing basis. -This is accomplished through a written agreement created when bonds are issued, referred to as a continuing disclosure agreement between the issuer or other obligated persons and the underwriter -There are two main types of continuing disclosures 1) annual financial information 2) event disclosures -Issuers are also permitted to disclose certain information on a voluntary basis -Listed below are the specific required disclosures: 1) Annual Financial Information -Financial information and operating data provided by state or local government, or other obligated persons -Audited financial statements for state or local government, or other obligated persons, if available 2) Event Notices -Principal and interest payment delinquencies -Nonpayment-related defaults -Unscheduled draws on debt service reserves, reflecting financial difficulties -Unscheduled draws on credit enhancements, reflecting financial difficulties -Substitution of credit or liquidity providers, or their failure to perform -Adverse tax opinions or events affecting the tax-exempt status of the security -Modifications to rights of security holders -Bond calls and tender offers -Defeasances -Release, substitution, or sale of property securing repayment of the securities -Rating changes -Bankruptcy, insolvency, or receivership -Merger, acquisition, or sale of all issuer assets -Appointment of successor trustee

The security used by municipalities to finance the cost of capital equipment such as waste hauling or excavating equipment is called a(n): A. Equipment trust certificate B. Asset-backed security C. Project financing note D. Certificate of participation

D. Certificate of participation Municipalities will use a certificate of participation (COP) to provide financing for a project that will be leased to a government entity. The term of the COP should closely mirror the useful life of the leased asset. A certificate of participation represents an investor's interest in an equipment sales contract. The city or state must appropriate funds to meet the debt service.

A issuer is told that if it issues a bond at today's rates, it will pay a fixed rate of 6.50%. A swap advisor indicates that at current rates the issuer could enter into a floating-to-fixed rate swap in which the swap rate is 5% and will receive LIBOR + 1%. If the issuer can sell floating-rate debt at LIBOR + 3% today, which of the following actions would you recommend? A. Issue a floating-rate security and enter into this interest-rate swap B. Issue a floating-rate security and not enter into this interest-rate swap C. Issue a fixed-rate security and enter into this interest-rate swap D. Issue a fixed-rate security and not enter into this interest-rate swap

D. Issue a fixed-rate security and not enter into this interest-rate swap An interest-rate swap is a situation where two parties enter into a contract to exchange cash flows based on two interest rates—one based on a fixed rate, known as the swap rate, and the other based on a variable or floating rate, such as LIBOR. The two parties to a swap are the issuer (the municipality) and the financial institution (such as a bank). A floating-to-fixed rate swap is a situation where the issuer will pay a fixed rate and receive a floating rate. If the floating rate is lower than the fixed rate, the party in a floating-to-fixed rate swap pays the difference to the swap dealer. This type of swap has the ability to convert variable-rate debt to payments based on a fixed rate. One of the benefits of using a swap is to lower the cost of funding for an issuer and, by issuing floating-rate debt and entering into a swap, the cost of funding may be less than issuing a fixed-rate bond. If the issuer sold a floating-rate bond at LIBOR + 3% and entered into a floating-to-fixed rate swap with a 5% swap rate, receiving LIBOR + 1%, it has in effect issued fixed-rate debt at 5% + 2% (the difference between what it pays and receives versus LIBOR). Whether LIBOR increases or decreases, this will not change. The issuer has in effect sold fixed-rate debt at 7%, which is higher than 6.50%. Based on the number in this example, the best recommendation is to issue a fixed-rate security and not enter into this interest-rate swap. It is also important to remember that if the municipality enters into a swap, it will take on additional risk.

Flipping in the municipal bond market has which of the following effects? A. It lowers the cost of financing for a municipal issuer B. The municipal issuer will be able to profit from this type of activity C. The price of the bonds will decline D. It increases the cost of financing for a municipal issuer

D. It increases the cost of financing for a municipal issuer Flipping occurs when a municipal securities dealer or institutional investor purchases bonds from an underwriter and immediately resells them to retail investors at a higher price. This can create large price increases in new municipal bond sales. It can be disadvantageous to an issuer since it will not receive any benefit in the increase in the price. For example, the issuer sells a new issue of bonds at par, but flipping allows a dealer or institutional investor to buy the bonds underwritten at par and resell them quickly to a retail investor at a price above par. The issuer might have able to sell the bonds at a price higher than par (a lower yield), which would enable it to lower its cost of financing.

Which of the following BEST defines the term private payment testconcerning a private activity bond? A. Less than 5% of the payment of principal or interest on the bond issue is made by a private business use B. More than 5% of the payment of principal or interest on the bond issue is made by a private business use C. Less than 10% of the payment of principal or interest on the bond issue is made by a private business use D. More than 10% of the payment of principal or interest on the bond issue is made by a private business use

D. More than 10% of the payment of principal or interest on the bond issue is made by a private business use The term private payment test is defined as more than 10% of the payment of principal or interest on the bond issue is made by a private business use and is concerned with whether a municipal bond issue is considered a private activity bond. The interest received by an investor from a private activity bond is federally taxable if the investor is subject to the alternative minimum tax (AMT)

When applying for a CUSIP number, all of the following information is required, EXCEPT the: A. Dated date B. Details of the redemption provisions C. Type of revenue if the issue is a revenue bond D. Name of the bond counsel who prepared the legal opinion

D. Name of the bond counsel who prepared the legal opinion When filing an application for CUSIP numbers, the following information must be provided: 1) The name of the issue and series designation, if applicable 2) The interest rate(s) and maturity date(s) 3) The dated date (the first day of interest accrual) 4) The type of issue (general obligation, revenue, etc.) 5) The type of revenue generated if the issue is a revenue bond 6) The details of any redemption provisions 7)Any other party who may be obligated to pay debt service on the issue Not Required: The name of the bond counsel who prepared the legal opinion

Which of the following entities may invest in a state-sponsored LGIP? A. Any public school system located within the state B. Residents of the sponsoring state C. Qualified institutional investors D. State or pool designated entities only

D. State or pool designated entities only Participation in an LGIP is determined by individual state law, or the rules of the individual LGIP.

All of the following are important factors when conducting a comparable sales pricing analysis for a negotiated underwriting, EXCEPT: A. The types of bond issues chosen should have the same tax treatment B. The issues should be located in the same state C. The bonds chosen should be the same type D. The bond sales compared should not take place on the same date

D. The bond sales compared should not take place on the same date -If an issuer offers bonds through a negotiated underwriting, the firm chosen may provide a comparable sales pricing analysis. This would be performed since the issuer and municipal advisor would want to make sure the offering was sold at the lowest yield. This may be difficult due to the uniqueness of the municipal bond market, but some of the factors are listed below. 1) The bonds should be the same type. G.O. bonds should not be compared with revenue bonds. 2) The issues should have the same or very similar ratings. However, a revenue bond that has credit enhancement with a higher rating should not be compared with a G.O. bond without credit enhancement. 3) The issues should be located in the same state. The tax implications in California are different than in Texas. 4) The bond sales compared should take place on the same date or as close in time as possible. The interest rate environment can change very quickly. 5) The types of bond issues chosen should have the same tax treatment, bonds subject to the AMT should not be compared with non-AMT bonds. Nor should bank-qualified bonds be compared with non-bank-qualified bonds. -It is also important to remember that these factors should be reviewed together, not independently. For example, since revenue bonds have a higher risk than G.O. bonds, the yield on a G.O. bond would be lower even if both bonds carried the same credit rating.

All of the following are TRUE concerning both Auction Rate Securities (ARS) and Variable Rate Demand Obligations (VRDOs), EXCEPT: A. Interest rates are set at specified intervals B. They are often issued by municipalities C. They are long-term securities with short-term trading features D. They have a put feature allowing the holder to redeem the security at par

D. They have a put feature allowing the holder to redeem the security at par Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARS) do not have this feature, and if the auction fails the investor may not have immediate access to their funds. In addition, ARS use an auction process to reset the interest rate on the securities, whereas the reset interest rate on a VRDO is set by the dealer at a rate that allows the securities to be sold at par value.

A feature that allows the issuer to call a bond due to extreme unforeseen circumstances is known as a(n):

Extraordinary Call An extraordinary call allows the issuer to call the bond when the source of revenue used to pay interest and principal on the bond is eliminated

If a municipal bond is bought in the secondary market at a discount and held until maturity by the purchaser: I. Interest is exempt from federal taxes II. The gain is subject to federal taxes and taxed as ordinary income III. Interest is subject to federal taxes IV. The gain is exempt from federal taxes and taxed as ordinary income

I and II Interest received from municipal bonds is exempt from federal taxation. However, any gain at maturity is subject to federal tax and taxable as ordinary income.

The GNP has been increasing while at the same time budget deficits have also been growing. Which TWO of the following statements are TRUE? I. Interest rates should rise II. Interest rates should fall III. Employment should be rising IV. Employment should be falling

I and III -GNP increases as a result of increased demand for goods and services -American industry adds capacity by, among other things, hiring additional employees to produce these additional goods and services -Budget deficits result from a mismatch between governmental income (for example, from taxes) and outflow of funds for traditional governmental programs, such as aid to the states or welfare -This results in budget deficits -To meet these deficits, the government would have to increase borrowing and this could cause interest rates to rise.

Which of the following are reasons why a state would set up a bond bank? I. To enable small school districts to borrow at lower rates II. To act as an investment vehicle for pension obligations III. To offer a higher credit rating to small municipal issuers IV. To allow citizens to purchase securities directly from the issuers

I and III A bond bank is an entity created by a state or agency to offer financing to smaller public entities such as cities, municipalities, school districts, hospitals, or water and sewer districts. A bond bank will purchase and hold municipal securities directly from these entities and finance its purchases by issuing its own debt. Bond banks can also act as a lender to these small issuers. The main advantage of using this type of financing is that a bond bank can issue debt which has a higher rating which results in lower interest cost for the small issuer. In addition, the cost of issuance will be lower given the lower administrative fees paid by the bond back versus a smaller issuer.

Which TWO of the following would have a negative impact on a municipality's credit risk? I. The realized investment returns are less than assumed returns II. The realized investment returns are greater than assumed returns III. The employees have been receiving increasing cost of living adjustments IV. The employees have been receiving decreasing cost of living adjustments

I and III If a municipality has an underfunded pension plan, this would have a negative impact on its credit risk. Some of the causes of underfunding are: 1) The contributions made by the municipality are insufficient. 2) The realized investment returns are less than assumed returns. In other words, the investment portfolio of the fund is underperforming expectations. 3) The employees have been receiving increasing cost of living adjustments. 4) The method of calculating the employee benefits is changed, which could be caused by a change (increasing) the discount rate used to calculate the amount of pension liabilities.

Which TWO of the following items are considered Other Post Employment Benefits (OPEB)? I. Long-term disability benefits II. Defined benefit retirement plans III. Life insurance IV. Defined contribution retirement plans

I and III OPEB describe nonpension postretirement benefits that may include medical, dental, vision, hearing, life insurance, long-term care, and long-term disability benefits that are not covered under a pension plan.

A municipality has bonds outstanding with a 5% coupon and is considering a refunding issue with a 4% coupon. Which TWO of the following methods would be acceptable for a municipal advisor to recommend for this advance refunding? I. The principal amount of the refunding issue is greater than the amount of bonds currently outstanding II. The principal amount of the refunding issue is less than the amount of bonds currently outstanding III. The refunding issue is sold at a premium IV. The refunding issue is sold at a discount

I and III When municipal bonds are advance-refunded, the funds are placed in an escrow account invested in Treasury or government securities. Due to the Treasury arbitrage restrictions, the yield on the securities in the escrow account may not exceed the yield on the refunding issue. Since the debt service on the outstanding bonds (5%) exceeds the highest allowable yield on the escrow account (4%), the difference needs to be made up by issuing bonds (the refunding issue) with a greater principal. Other methods of accomplishing this goal are issuing the refunding issue at a premium or the issuer making a cash contribution.

An analyst is comparing yield relationships between quality groups when rates are high and when rates are low. Which TWO of the following conclusions are valid? I. The spread between quality groups increases when rates are high II. The spread between quality groups remains the same regardless of rate levels III. The spread between quality groups decreases when rates are low IV. No conclusion can be drawn when comparing quality groups at different rate levels

I and III When we use the term quality groups, we are talking about the rating of a bond. All bonds which are rated Aaa are in the highest quality group, the quality descending with the bond ratings. It is interesting to note that when rates are high, the spread between the lower-rated quality groups and the higher-rated quality groups would widen. For example, a Baa bond might yield 8% whereas an Aaa bond might yield 5%, with the difference in yield being 300 basis points. When yields decline, the Aaa-rated bonds might yield 4% and Baa-rated bonds might yield 6.50%, thus narrowing the spread to 250 basis points.

Which of the following statements is/are TRUE regarding bond price volatility? I. Bond prices of long-maturity issues are more volatile than those of short maturity II. High-coupon bonds are more volatile in price than low-coupon bonds III. For a given yield change, there is greater volatility in a low-yield environment IV. There is a linear relationship between yield changes and price changes.

I and III only For a given yield change, the prices of long-term bonds are more volatile than short-term bonds. The stronger the yield environment, the lower the bond price volatility. Consider the following: We are looking at two bonds—one has an 11% coupon and the other a 6% coupon, and both are at par with 20-year maturities. If there was an increase in yields by 1%, the yields to maturity would change to 12% and 7%. The movement on the 11% coupon bond is from par to 94.265 or roughly a 5 3/4% decline. But the 6% coupon would have to decline to 89.32, a drop of over 10%, to bring the yield to maturity up to 7%. The relationship between yield and price is not linear; the term that describes this phenomenon is convexity.

For a special assessment bond, the debt service is paid from which TWO of the following? I. It is split based on the value of the benefit received II. It is split evenly among all of the individuals who live in the area III. It is split evenly among the benefitting property owners IV. It is split based on the value of a person's property

I and IV A special assessment bond is backed by a charge which is imposed against the property that received the benefit. Examples include sidewalks as well as water and sewer systems. The debt service is paid based on the value of the benefit received or on the valuation of the property. Ultimately, the higher the value of the property, the greater the benefit and the greater the assessment for the property owner.

A low to high refunding will result in which TWO of the following? I. Invest the escrow account in securities that would exceed the rate on the bonds to be refunded II. Invest the escrow account in securities that are lower than the rate on the bonds to be refunded III. The principal amount of government securities required would be higher than the bonds being refunded IV. The principal amount of government securities required would be lower than the bonds being refunded

I and IV Normally a refunding issue is done by issuing bonds at a lower rate than bonds currently outstanding. In other cases, a refunding is done by issuing bonds at a higher rate than bonds currently outstanding. This is referred to as a low to high refunding and is usually done to modify the debt structure of the issuer, or to remove or modify a bond covenant. When municipal bonds are advance-refunded, the funds are placed in an escrow account invested in Treasury or government securities. Due to the Treasury arbitrage restrictions, the yield on the securities in the escrow account may not exceed the yield on the refunding issue. In a low to high refunding, the issuer could invest the escrow account in securities that would exceed the rate on the bonds to be refunded, which would allow the principal amount of government securities required to be lower than the bonds being refunding. For example, a municipality has bonds outstanding at a 3% rate and refunds at a rate of 4%. The escrow account could not exceed 4% (the refunding issue), but this rate of 4% is still higher than the rate on the bonds to be refunded (3%). Since the escrow account would have a higher rate than the bonds outstanding, the principal amount of government securities required would be lower than the bonds being refunded.

Which TWO of the following would be considered advantages to municipal issuers over corporate issuers? I. A lower coupon can be put on the bonds II. A higher coupon can be put on the bonds. III. Debt service is greater than taxable bonds. IV. Debt service is less than taxable bonds.

I and IV The advantages an issuer of municipal debt has over corporate issuers is the ability to put lower coupons on the bonds since the interest is tax-exempt to purchasers and, as a result, the issuer's debt service will be lower.

Which TWO of the following are the most commonly used benchmarks for floating rates on municipal interest-rate swaps? I. LIBOR II. Ten-year Treasury notes III. The Bond Buyer Index IV. The SIFMA Municipal Swap Index

I and IV The two most commonly used benchmarks for floating rates on municipal interest-rate swaps are LIBOR and the SIFMA Municipal Swap Index.

Which TWO of the following statements are TRUE concerning pension funding assumptions? I. Assuming a higher rate of return will result in lower required contributions II. Assuming a lower rate of return will result in lower required contributions III. Actual earning that are greater than assumed result in larger unfunded liabilities IV. Actual earnings that are less than assumed result in larger annual contributions

I and IV only By assuming a higher rate of return on pension plan assets, this will result in a lower required contribution. However, if actual earnings are less than the assumed rate of return, unfunded liabilities will increase, and annual contributions will ultimately be required.

Which of the following should be considered by an investor looking at municipals with an objective of liquidity and marketability? I. Maturity II. Block size III. Call date IV. Credit rating

I, II, III, and IV Maturity, block size, call date, and credit rating would all affect the liquidity and marketability of a block of bonds.

Which of the following ratios is/are used by bond analysts? I. Overall debt to full value II. Overall debt to population III. Annual debt service to tax receipts and other revenues

I, II, and III All of the ratios listed are used by analysts when evaluating municipal bonds. Overall debt to full value refers to net general obligation and overlapping debt as a percentage of full real estate valuation. Overall debt to population (also called overall debt per capita) refers to the net general obligation and overlapping debt per person. Annual debt service to net revenues compares the annual principal and interest owed to bondholders to the municipality's net revenues.

Which TWO of the following choices are important economic indicators for the municipal bond market? I. The unemployment rate for state or city as compared to the national unemployment rate II. The gross domestic product (GDP) for the U.S. III. Changes in the building permits in a town or city IV. The consumer price index (CPI)

II and III Although national (U.S.) economic indicators such as GDP and CPI are important concerning any fixed-income security or bond, state, city, and local economic indicators are much more important when analyzing municipal debt. The U.S. Bureau of Economic Analysis publishes data for GDP, personal income, employment, personal consumption, and other data for states and metropolitan areas. The U.S. Census Bureau publishes different housing market indicators such as new residential construction, new residential sales, and building permits that can be used to analyze trends in the local housing market.

The rating on municipal bonds is primarily derived from which TWO of the following choices? I. The tax-exempt status of the issuer II. The creditworthiness of the issuer III. The creditworthiness of the entity that provided the credit enhancement IV. The amount of volatility concerning the level of interest rates

II and III The rating on municipal bonds is primarily derived from mainly either the creditworthiness of the issuer or the creditworthiness of the entity that provides the credit enhancement. The credit enhancement would be in the form of insurance (by a bond issuer) or a letter of credit (by a bank). The purpose of credit enhancement is to reduce the interest costs for the issuer.

Which TWO of the following securities are typically sold at a discount? I. TIPS II. Treasury bills III. Bankers' acceptances IV. Collateralized mortgage obligations

II and III Treasury bills and bankers' acceptances are typically sold at a discount. The amount of interest is based on the difference between the purchase price and the face value.

Which TWO of the following types of municipal securities does NOT require voter approval? I. A general obligation bond backed by income taxes II. A special tax bond III. A bond backed by ad valorem taxes IV. A certificate of participation

II and IV -A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. -A bond backed by ad valorem or real estate taxes is a type of general obligation bond -A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval -A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.

Which TWO of the following are subject to the continuing disclosure requirements under SEC Rule 15c2-12? I. An issue of less than $1,000,000 II. A bank-qualified bond III. Bonds that are sold in denominations of at least $100,000 to no more than 35 investors IV. Bonds that are sold in denominations of at least $100,000 and have a maturity of longer than nine months

II and IV -SEC Rule 15c2-12 pertains to most primary offerings of municipal securities, with the following exceptions. -A primary offering of municipal securities with an aggregate principal amount of less than $1,000,000 -Bonds that are sold to investors in units of no less than $100,000 and are sold to no more than 35 sophisticated investors (private placement) -Bonds that are sold in $100,000 minimum denominations and mature in nine months or less -Prior to 2010, Rule 15c2-12 also contained an exemption for bonds in authorized denominations of $100,000 or more if the bonds could be tendered at the option of the bondholder at least every nine months. -This exemption applied to variable-rate demand obligations (VRDOs). -These securities that were outstanding as of November 30, 2010 can be remarketed or reoffered without complying with the continuing disclosure obligation, as long as the bonds continuously maintain a $100,000 minimum denomination and tender rights of nine months or less -Also exempt are any offerings that are sold by an issuer directly to an investor without using an underwriter (a direct loan). There is no exemption for bank-qualified bonds.

A municipal advisor is required to maintain which TWO of the following books and records? I. Copies of the official statements in which it acted in the capacity of a municipal advisor II. Copies of its policies and procedures manual III. A listing of the types of municipal advisory services it provides to issuers and obligated persons IV. Originals or copies of all written communication received and sent by the municipal advisor relating to municipal advisory services

II and IV MSRB Rule G-8 requires municipal securities broker-dealer and municipal advisors to maintain certain books and records -One section of this rule, which is related to municipal advisors, requires a municipal adviser to maintain books and records in accordance with SEC Rule 15Ba1-8. (SEC Rule 15B relates to municipal advisors.) -Under this SEC rule, the following records must be maintained: 1) Originals or copies of all written communications received, and originals or copies of all written communications sent, by such municipal advisor (including interoffice memoranda and communications) relating to municipal advisory activities, regardless of the format of such communications 2) All checkbooks, bank statements, general ledgers, cancelled checks and cash reconciliations of the municipal advisor 3) A copy of each version of the municipal advisor's policies and procedures 4) A copy of any document created by the municipal advisor that was material to making a recommendation to a municipal entity or obligated person, or that memorializes the basis for that recommendation 5) All written agreements (or copies thereof) entered into by the municipal advisor with any municipal entity, employee of a municipal entity, or an obligated person or otherwise relating to the business of such municipal advisor as such 6) A record of the names of persons who are currently, or within the past five years were, associated with the municipal advisor, not including persons associated with the municipal advisor prior to July 1, 2014 7) Books and records containing a list or other record of: i. The names, titles, and business and residence addresses of all persons associated with the municipal advisor ii. All municipal entities or obligated persons with which the municipal advisor is engaging or has engaged in municipal advisory activities in the past five years, not including those prior to July 1, 2014 iii. The name and business address of each person to whom the municipal advisor provides or agrees to provide, directly or indirectly, payment to solicit a municipal entity, an employee of a municipal entity, or an obligated person on its behalf iv. The name and business address of each person that provides or agrees to provide, directly or indirectly, payment to the municipal advisor to solicit a municipal entity, an employee of a municipal entity, or an obligated person on its behalf 8) Written Consents to Service of Process from each natural person who is a person associated with the municipal advisor and engages in municipal advisory activities solely on behalf of such municipal advisor -There is no requirement to maintain copies of the official statements in which it acted in the capacity of a municipal advisor or a listing of the types of municipal advisory services it provides issuers and obligated persons.

In which of the following cases would a financial advisory relationship exist according to the MSRB? I. A broker-dealer, while acting as an underwriter for a municipal offering, gives advice to the issuer regarding the structure of the issue II. A broker-dealer gives a municipal issuer advice about a new issue with respect to the issue's timing and terms and is compensated for this advice under a written agreement III. A broker-dealer not involved in a new municipal offering gives advice to a customer regarding the suitability of the new issue

II only A financial advisory relationship is deemed to exist when a broker-dealer or dealer bank, for compensation or the expectation of compensation, gives an issuer advice about a new issue with respect to the issue's structure, timing, or terms of the offering. However, this does not include situations in which a municipal securities firm gives such advice to an issuer in its role as an underwriter, which is why choice (I) is not correct. Choice (III) is incorrect because there is no prohibition from offering advice to a customer regarding the suitability of a new issue in which the dealer has a financial advisory relationship.

For a municipality, signs of a deteriorating credit situation would be: I. An increase in tax collections II. An increase in assessed valuations III. An increase in unfunded pension liabilities IV. A dramatic increase in the amount of credit obligations outstanding

III and IV only Unfunded pension liabilities is the difference between the amount the municipality will owe to retired employees and the amount the municipality has set aside for those obligations.

When computing the dollar price of a municipal bond sold on a yield basis, which of the following call features will be used? I. Sinking fund call II. Catastrophe call III. In-whole call

III only When pricing a bond, only a call feature that allows the issuer to call the entire issue is used

The provisions for the flow of funds of a revenue bond issue appear in the:

Indenture The indenture contains all the agreements and covenants pertaining to a bond issue, and would contain the provisions for the application and allocation of funds of a revenue bond.

A new issue of municipal bonds are backed by the local government's taxing authority, which is restricted by statute. The rate of tax on assessed property value, has a ceiling. Bonds backed by such restricted taxing authority are called:

Limited tax bonds -This question refers specifically to a limited tax bond, for which a ceiling is established as to the rate of tax assessment -This places a ceiling on the amount of debt that the municipality can incur. While the other choices are incorrect, we should define each of the bonds. A special tax bond is a bond which is backed by a tax on a specific item, for example, cigarettes or gasoline. A moral obligation bond is a bond which is issued by some authority created by a state perhaps, but yet not backed directly by the state. Instead, the state indicates that, if necessary, it may step in and assist the issuer. The unlimited tax bond is another term for the traditional general obligation bond in which the rate of tax is not limited by law.

For a competitive offering of municipal securities, an issuer's right to reject any and all bids will usually be contained in the:

Notice of Sale The Notice of Sale for a municipal bond offering will normally contain a provision stating that the issuer retains the right to reject any and all bids if it is considered to be in its best interest to do so. This is done to protect the issuer from being obligated to accept an unsuitable bid.

The next highest bid in the primary market is referred to as the:

cover bid Relative to the highest (best) bid on an issue in the primary or secondary market, the next highest bid is known as the cover bid. The difference between the highest bid and the next highest bid is referred to as the cover. A competitive bid is another term for a competitive sale which is when underwriters submit proposals for the purchase of a new issue. A qualified bid is a secondary market bid that is subject to conditions. A workout bid, or a workable, refers to a price at which a municipal securities dealer is potentially willing to purchase securities.

An official statement for a general obligation bond says that property taxes may not be raised above a certain level. This is known as a:

limited tax bond A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be raised.