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All books and records required to be maintained by a municipal advisor must be kept in an easily accessible place for a minimum of:

2 years

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield to maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: A. $0 B. $25 C. $50 D. $100

A. $0 Explanation: The IRS requires that a premium paid for a municipal bond be amortized over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.

If interest rates are expected to rise, which of the following securities would have the greatest amount of capital risk? A. A bond trading at a premium and callable in 20 years B. A bond trading at a premium and callable in 10 years C. A bond trading at a premium and callable in five years D. A bond trading at a premium and callable in one year

A. A bond trading at a premium and callable in 20 years Explanation: Capital risk is the risk that an investor will lose the principal or amount of monies invested. As interest rates rise, the value (price) of existing bonds will fall since the demand for existing bonds that offer lower interest rates will decline. If interest rates fall, the value (price) of existing bonds will rise since they are worth more than a new bond issued with a lower coupon. In other words, there is an inverse relationship that exists between market interest rates and existing bond prices. The prices of bonds with a longer term to maturity will rise or fall faster than bonds with a shorter term to maturity. Bonds that are selling at a discount (i.e., have a lower coupon) fluctuate more than bonds that are selling at a premium (i.e., have a higher coupon). Since all of the bonds listed are trading at a premium, the one with the greatest amount of capital risk is the bond with the longest time to maturity.

Which of the following bonds results in the highest real interest rate? A. A bond yields 8% when inflation is at 3%. B. A bond yields 12% when inflation is at 8%. C. A bond yields 10% when inflation is at 7%. D. A bond yields 6% when inflation is at 4%.

A. A bond yields 8% when inflation is at 3% Explanation: The real interest rate, also referred to as the real rate of return, refers to a bond's yield after its been adjusted for inflation (yield minus inflation rate). The highest real interest rate is realized on a bond that yields 8% when the rate of inflation is 3%. This bond provides a real interest rate of 5% (8% - 3%).

Which of the following statements is TRUE concerning pension funding assumptions? A. Assuming a higher rate of return will result in lower required contributions B. Assuming a lower rate of return will result in lower required contributions C. Actual earnings that are greater than assumed, result in larger unfunded liabilities D. Actual earnings that are less than assumed, result in larger annual contributions

A. Assuming a higher rate of return will result in lower required contributions Explanation: Assuming a higher rate of return on pension plan assets 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.

In order to be excluded from the definition of a municipal advisor, a broker-dealer must: A. Be an underwriter of a specific bond offering B. Be an underwriter of the municipal issuer C. Provide advice on municipal derivatives D. Provide advice on investment strategies

A. Be an underwriter of a specific bond offering Explanation: One of the exclusions from the definition of a municipal advisor is a broker-dealer that provides advice in its capacity as an underwriter. In order for this exclusion to apply, the dealer must be an underwriter of a specific municipal bond. If the firm has underwritten other bonds of this issuer and provides advice to an issuer on a bond issue it is not underwriting, the exclusion would not apply. In addition, if a dealer provides advice to an issuer or obligated person on municipal derivatives, or advice on investment strategies, the underwriter exclusion is not permitted.

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 fixed-rate security and not enter into this interest-rate swap B. Issue a fixed-rate security and enter into this interest-rate swap C. Issue a floating-rate security and not enter into this interest-rate swap D. Issue a floating-rate security and enter into this interest-rate swap

A. Issue a fixed-rate security and not enter into this interest-rate swap Explanation: 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.

A municipality is concerned that interest rates will be rising and wants to issue fixed-rate debt to fund a capital project. The financial adviser has indicated that there will be limited demand from investors interested in fixed-rate debt. Which of the following actions would you recommend? A. Issue floating-rate debt and enter into a floating-to-fixed rate swap B. Issue floating-rate debt and enter into a fixed-to-floating rate swap C. Hold off from issuing the debt until investor demand is sufficient D. Issue only enough debt you anticipate will be purchased by investors seeking a fixed rate

A. Issue floating-rate debt and enter into a floating-to-fixed rate swap Explanation: One reason to use an interest-rate swap is to increase the issuer's investor base. The main objective of a floating-to-fixed rate swap is to enable a municipality that has issued floating-rate debt (variable-rate debt) to make its payments based on a fixed rate. If the municipality issues floating-rate debt and enters into this type of swap, it would broaden its investor base to include floating-rate debt, but make its payments based on a fixed rate. It is also important to remember that if the municipality enters into a swap, it will take on additional risk.

A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT: A. Refund a mass transportation bond B. Raise capital to expand its school system C. Make a primary offering to establish a public sewer system D. Raise additional capital for a government housing project

A. Refund a mass transportation bond Explanation: A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt except for refundings, working capital, private activity bonds, and 501(c)(3) borrowers.

Which of the following actions would be MOST suitable for an issuer with fixed-rate debt that believes interest rates will rise considerably in the near future? A. Take no immediate action B. Enter a vanilla swap as receiver C. Purchase a payer swaption D. Refund all outstanding debt

A. Take no immediate action Explanation: An issuer of fixed-rate debt typically would not want to refund debt in a rising-interest-rate environment. The receiver leg of a vanilla swap receives a fixed rate in exchange for paying a floating rate. If interest rates were expected to rise, this would not benefit the issuer. Likewise, a payer swaption (swap option) gives the right to enter into a swap as a receiver. Since the issuer has fixed-rate debt outstanding and expects rates to rise, the best choice is to take no immediate action.

The Federal Reserve would NOT take measures to ease the money supply in which of the following situations? A. There is high inflation B. The gross national product has been declining C. The economy is in a recession D. Unemployment is high

A. There is high inflation Explanation: The Fed is likely to ease money supply if the economy is sluggish (decrease in GDP), providing inflation is not a problem. If unemployment is high, the economy is probably either in a recession, a trough, or in the early stages of an expansion. Therefore, stimulating the economy through the easing of credit would be advisable. A high rate of inflation is normally indicative of too much in circulation chasing a limited supply of goods and services. To combat high inflation, the Fed would normally take measures to reduce (tighten) the money supply.

A high to low refunding would be LEAST likely done by a municipal issuer for which of the following reasons? A. To invest in government securities with a rate higher than the refunding issue B. To take advantage of declining interest rates C. To accomplish a net present value savings D. In anticipation of the FRB increasing the money supply

A. To invest in government securities with a rate higher than the refunding issue Explanation: A refunding issue is usually done by issuing bonds at a lower rate than bonds currently outstanding. This is referred to as a high to low refunding and is usually done to accomplish a net present value savings and to take advance of declining interest rates. The FRB increasing the money supply would indicate a lower-interest-rate environment. 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 high to low refunding, the issuer would invest the escrow account in securities that are lower than the rate on the bonds to be refunded.

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

Answer: $1.25 per $1,000 par value Explanation: 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 municipality issues $70,000,000 of 6% bonds that will mature in 20 years with call protection of 10 years. The indenture states the annual amount of principal payments deposited in a sinking fund remains the same over the life of the issue of bonds. Eight years later, rates have declined to 4.5% and the issuer would like to issue a new bond to capture the lower, rate. The issuer sells $42,000,000 of 4.5% refunding bonds maturing in eight years with a same type of principal repayments. What will the annual cost savings be once the original bonds are refunded?

Answer: $560,000 Explanation: The 20-year bonds will have $3,500,000 of annual principal payments ($70,000,000 / 20) and the 8-year bonds will have $5,250,000 of annual principal payments ($42,000,000 / 8). Annual interest on the original bonds is $4,200,000 ($70,000,000 x 6%) and the interest on the refunding issue is $1,890,000 ($42,000,000 x 4.5%). Annual cost savings is $560,000

A municipal revenue bond is secured by the revenues of a toll road system showing the following: Annual Debt Service: $3,000,000 Annual Gross Revenues: $8,000,000 Annual Operating and Maintenance Expenses: $5,000,000 Based upon the information shown above, the annual debt service coverage would be:

Answer: 1 to 1 Explanation: The formula for the debt service coverage ratio is net revenues divided by the annual debt service Step 1: Calculate the net revenue for the municipal revenue bond: Annual gross revenues $8,000,000 - Annual O/M Expenses $5,000,000 = Net Revenue $3,000,000 Step 2: Divide net revenue of $3,000,000 by the debt service of $3,000,000 to calculate the debt service coverage ratio. The debt service coverage ratio is 1 to 1.

An investor has a federal tax rate of 35% and a state tax rate of 6% and is offered a 4.90% in-state municipal bond. What yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?

Answer: 8.31% Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. Since the investor is purchasing an in-state bond, we use the combined rate of 41%. The formula is: [Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield] The customer is in the 41% tax bracket. The municipal bond has a yield of 4.90%. 4.90% (Municipal Bond Yield) / 59% (100% - 41%) = 8.31% Equivalent Taxable Yield

While working as a lobbyist, Veronica contributed $500 to the reelection campaign of her state senator. Eighteen months later, Veronica takes a job with Aregon Financial as an MAP. Is Aregon Financial subject to a limitation with the state due to Veronica's earlier contribution?

Answer: Aregon is subject to a six-month disqualification Explanation: Municipal advisor professionals are limited to a maximum contribution of $250 per official, per election in which they are entitled to vote. Under Rule G-37, nonexempt contributions are subject to a two-year business ban. New hires are subject to a two-year look-back. Since the contribution was made 18 months prior to Veronica joining the firm, Aregon is subject to a six-month disqualification.

What is the calculation to determine a municipality's Net Position under Governmental Accounting Standards Board rules?

Answer: Assets + Deferred Outflows of Resources - Liabilities - Deferred Inflows of Resources Explanation: An important formula in municipal accounting is the Statement of Net Position, which is similar to a balance sheet in corporate accounting. The formula for calculating a municipality's Net Position is: Assets + Deferred Outflows of Resources - Liabilities - Deferred Inflows of Resources. A deferred outflow (a prepaid item) is a consumption of net assets by the government that is applicable to a future reporting period and a deferred inflow (advance collection) is an acquisition of net assets by the government that is applicable to a future reporting period. Another way of looking at this is that a deferred outflow is a type of future asset and a deferred inflow is a type of liability.

Scenic Falls is issuing bonds to convert an old mill facility into a shopping center. Which of the following actions would Scenic Falls need to take? A. Hire a ratings agency to assess the feasibility of the project B. Seek the approval of the town's financial advisor C. Hold a public hearing within 14 days of a published notice D. Ensure that an additional bonds test is conducted

Answer: C. Hold a public hearing within 14 days of a published notice Explanation: Since these bonds are financing a private activity, TEFRA requires that a public hearing be held within 14 days of a TEFRA Notice to allow interested parties to comment on the project. Ultimately, the bonds must be approved by an elected official or government body. Ratings agencies do not provide feasibility studies. Financial advisors do not approve bond issues. An additional bonds test is conducted for a new issue of revenue bonds which will be backed by the same revenue stream as other outstanding bonds.

Which of the following actions would cause reserves in the banking system to decline? A. The Fed lowering the discount rate B. The Fed following an easy money policy C. The Fed selling securities D. The Fed buying securities

Answer: C. The Fed selling securities Explanation: The tool used most often by the FRB to effect changes in monetary policy is open market operations. When the Fed sells U.S. government securities in the open market, the effect on the banking system will be to drain money out of the banking system, causing a decrease in reserves and a decrease in the money supply. Increasing or decreasing the discount rate or changing the reserve requirements could have an impact on excess reserves, but is less likely to be used.

Which type of bankruptcy is available to a municipality?

Answer: Chapter 9 Explanation: A municipality declaring bankruptcy would file under Chapter 9. Chapter 7 is a corporation liquidation. Chapter 11 is a corporation restructuring, and Chapter 13 is a personal bankruptcy filing

All of the following statements are TRUE concerning documentation requirements under Rule G-42, EXCEPT: A. Conflicts of interest must be disclosed along with how they will be managed or mitigated B. Disclosure of legal and disciplinary events may be made by referencing Forms MA and MA-I C. Recent material changes to Forms MA and MA-I must be disclosed and explained D. Recent changes to conflicts of interest may be disclosed by referencing Forms MA and MA-I

Answer: D. Recent changes to conflicts of interest may be disclosed by referencing Forms MA and MA-I Explanation: Under Rule G-42, firms must fully and fairly disclose in writing all material conflicts of interest as well as details of how these conflicts will be managed or mitigated. Form MA and MA-I are SEC filings that must disclose legal or regulatory events. Material conflicts of interest are based on individual relationships between a municipal advisor and its clients and, therefore, would not be disclosed on Forms MA or MA-I. Disclosure of legal and disciplinary events may be satisfied by providing details of the types of disclosures required on Forms MA and MA-I and detailed instructions on how clients may access the Forms through the SEC's EDGAR site. Any recent changes to Forms MA and MA-I, including a brief explanation of these changes, must also be disclosed.

Under IRS rules, how long must an issuer maintain records relating to a tax-exempt bonds it has issued?

Answer: For three years past redemption Explanation: Under IRS rules, an issuer is required to maintain records relating to a tax-exempt bond it issued as long as the bonds are outstanding plus three years.

What entity sets standards for an issuer's financial statements?

Answer: GASB Explanation: Although municipal advisors are regulated by the MSRB and SEC, issuers are exempt from regulation and registration with FINRA, MSRB, and the SEC. The Government Accounting Standards Board (GASB) sets accounting standards for municipal issuers.

If a municipal advisor is also registered as a broker-dealer, which TWO of the following statements are TRUE? I. Its recordkeeping responsibility would be met if its books and records are maintained in compliance with SEC Rules 17a-3 and 17a-4 II. Its recordkeeping responsibility would not be met if its books and records are maintained in compliance with SEC Rules 17a-3 and 17a-4 III. Its recordkeeping responsibility would be met if its books and records are maintained in compliance with MSRB Rules IV. Its recordkeeping responsibility would not be met if its books and records are maintained in compliance with MSRB rules

Answer: I and III Explanation: Municipal advisors are required to maintain certain books and records. One section of this rule that relates to municipal advisors requires a municipal advisor to maintain books and records in accordance with SEC Rule 15Ba1-8. (SEC Rule 15B relates to municipal advisors.) This SEC rule states that any records made and preserved in accordance with SEC Rules 17a-3 and 17a-4, MSRB rules, or IA Act rules that are substantially similar to records required to be maintained and preserved under Rule 15Ba1-8 shall be deemed to satisfy the requirements of new Rule 15Ba1-8.

A municipality may be required to issue bonds at a higher rate under which TWO of the following conditions? I. The municipality's unemployment rate is increasing at a faster rate than the national rate II. The municipality's building permits have increased at a faster rate than the national rate III. The municipality's GDP has declined at a faster rate than the national rate IV. The municipality's personal income growth rate has increased at a faster rate than the national rate

Answer: I and III Explanation: 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 negative factors

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.

Answer: I and III only Explanation: 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.

Which TWO of the following statements are TRUE concerning documentation requirements under Rule G-42? I. Disclosure of conflicts of interest may be made by referencing Forms MA and MA-I II. Disclosure of legal and disciplinary events may be made by referencing Forms MA and MA-I III. Recent material changes to Forms MA and MA-I must be disclosed and explained IV. Recent changes to conflicts of interest may be disclosed by referencing Forms MA and MA-I

Answer: II and III Explanation: Under Rule G-42, firms must fully and fairly disclose in writing all material conflicts of interest. Forms MA and MA-I are SEC filings that must disclose legal or regulatory events. Material conflicts of interest are based on individual relationships between a municipal advisor and its clients and, therefore, would not be disclosed on Forms MA or MA-I. Disclosure of legal and disciplinary events may be satisfied by providing details of the types of disclosures required on Forms MA and MA-I and detailed instructions on how clients may access the Forms through the SEC's EDGAR site. Any recent changes to Forms MA and MA-I, including a brief explanation of these changes, must also be disclosed.

Which TWO of the following types of municipal securities does NOT require voter approval? I. 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

Answer: II and IV Explanation: 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.

Under which TWO of the following instances would the issuer be exempt from the IRS yield restrictions? I. The municipality used the funds for working capital within two years II. The municipality used the funds for a capital project within two years III. The municipality used no more than 10% of the proceeds over a five-year period IV. The municipality used no more than 5% of the proceeds to earn a material yield difference

Answer: II and IV Explanation: If the interest received by investing the proceeds of a municipal bond exceed by a material amount the interest paid by the issuer on these bonds, the issuer may have violated the IRS's Treasury arbitrage restrictions. When this occurs, the IRS declares the bonds to be arbitrage bonds. However, three exemptions exist, as follows. 1) The proceeds are used within three years for a capital project or within 13 months for working capital. 2) The proceeds are used as part of a reasonably required reserve fund or replacement fund. 3) A small portion of the bond's proceeds (an amount not exceeding the lesser of 5% of the bond's proceeds of the issue or $100,000) is used to earn the material yield difference.

When analyzing the credit strength of a municipal issuer, consideration should include which TWO of the following factors? I. The condition of the U.S. economy II. The current financial status of the municipality III. Money supply figures IV. The general capability of the fiscal officers of the municipality

Answer: II and IV Explanation: The state of the local economy (not the U.S. economy) is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt and this must be understood in the analysis. The current financial status is also important to determine the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board are not relevant with regard to the credit strength of a municipality.

Which of the following statements are TRUE concerning the documentation for interest-rate swaps? I. A Master Agreement must be negotiated for each transaction II. The Schedule contains negotiated amendments to the Master Agreement III. Events of Default are contained in the Definition Booklet IV. The ISDA Master Agreement is the standard governing document

Answer: II and IV only Explanation: The ISDA Master Agreement is the standard governing document for interest-rate swaps. The Master Agreement may be negotiated for each agreement, or may be negotiated once and used for multiple transactions. The Schedule contains negotiated amendments to the Master Agreement. Events of Default are found in Section 5 of the Master Agreement.

Which of the following statements concerning municipal bonds trading at a discount are TRUE? I. The investor would have been better-off buying the bond at its original issue price rather than waiting for it to drop in price in order to lock-up the higher yield available at issuance II. The investor will receive a higher yield to maturity by purchasing the bond at a discount, however, this could be eliminated if the bond is called at a premium before the final, stated maturity date III. Whenever an investor buys a municipal bond at a discount, the yield to maturity is greater than if the bond were bought at par IV. The investor still has to pay taxes as a result of purchasing a municipal bond at a discount, since the gain is subject to taxation

Answer: III and IV only Explanation: Two key points should immediately be noted. First, that we are dealing with a municipal bond, and second, that it is at a discount. The fact that it is a municipal bond means that we are receiving interest income which is tax-free. Second, the fact that it is at a discount means that, if we hold it until it matures, we will have appreciation. Even though it is a municipal bond, that appreciation is subject to taxation as ordinary income. Whenever a bond is trading at less than its par value, both its current yield and its yield to maturity will be greater than the nominal yield or coupon rate. Conversely, when a bond is trading at a premium, both its current yield and its yield to maturity will be lower than its nominal or coupon yield.

Concerning municipal issues that are callable, which of the following statements would be TRUE? I. the bonds will be called if interest rates rise after the bond is issued. II. The bonds will most likely be callable within the first year of issuance. III. The bonds will always be called at premium. IV. The bonds will normally be called if, after being issued, interest rates decline

Answer: IV only Explanation: The bonds would most likely be called when interest rates decline. The issuer would call (retire) the original debt and then be able to issue new debt at a lower interest rate, thus saving the difference in debt service to be paid over the remaining life of the bonds. This is called refunding. The bonds would not usually be callable within the first year because investors demand some period of call protection.

Rank the following instruments in order of liquidity, with the most liquid item being first: I. 25-year term bond, original issue $50,000,000 II. 25-year serial bond, original issue $3,000,000 III. A two-year RAN IV. A six-month TAN

Answer: IV, III, I, II Explanation: The correct order of liquidity, with the most liquid item being first, would be: 1) Six-month TAN 2) Two-year RAN 3) 25-year term bond, original issue $50,000,000 4) 25-year serial bond, original issue $3,000,000 -The TAN and RAN would be ranked first and second due to the length of time to maturity -The $50,000,000 25-year term bond would be next because of its size.

Arrange in order the following Fitch bond ratings, starting from the LOWEST rating. I. AA- II. A+ III. BBB IV. BB+

Answer: IV, III, II, I Explanation: 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.

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

Answer: Indenture Explanation: 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 MAP and spouse gave $400 to the Grant campaign victory celebration. Each spouse signed the check. How would this contribution be treated according to political contribution rules?

Answer: It would be viewed as a $200 contribution from each party Explanation: When both the MAP and spouse sign a contribution check, the contribution is viewed as split evenly between the contributors. The underwriting ban will not be triggered since the MAP has a $250 threshold. Post-election contributions used to pay for inaugural expenses count as political contributions according to MSRB rules.

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):

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

A municipal tombstone ad shows bonds maturing serially from 2022 through 2040. The 2040 maturity is a 6.00% bond offered at a 6.75 basis. The bonds maturing in 2030 and thereafter are callable beginning in 2028 @ 102, at 101 in 2029, and at par on any interest date after 2029. The bonds maturing in 2040 should be priced to the

Answer: Maturity date Explanation: The bonds are being offered at a discount since the yield to maturity (6.75%) is greater than the coupon rate (6.00%). A discount bond is always priced to maturity.

Placko Brokerage located in Walkahoma, Florida is in the final stages of a negotiated underwriting of the City of Otumwa, IA revenue bonds. The proceeds of the issue are going to be used to build a new baseball stadium for the Otumwa Burros, a minor league baseball team. The city sends your firm airline tickets valued at $360 each for the underwriting manager and three associated persons to attend the final due diligence meeting. Would the receipt of these airline tickets violate the gift rule?

Answer: No, because they are legitimate business expenses Explanation: Gifts in excess of $100 per person per year would violate the gift rule; however, business expenses permitted by the IRS are excluded from the gift rule.

A ten year municipal bond originally issued at par is purchased in the secondary market for $950. The $50 gain realized at maturity is reported as

Answer: Ordinary Income Explanation: If a municipal bond is purchased in the secondary market at a discount and held to maturity, the difference between the purchase price and par value received at maturity is reported as ordinary income.

The firm which assists an issuer in making sure it is in compliance with arbitrage restrictions of federal tax law is known as a(n)

Answer: Rebate compliance consultant Explanation: In order to make sure the issuer does not violate IRS Treasury arbitrage restrictions, it may hire a rebate compliance consultant. 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.

Money put aside on a municipal revenue issue for the betterment and improvement of the facility is placed in the

Answer: Renewal and replacement fund

A municipal bond with an in-whole call provision has a 6.80 coupon rate and matures in 2035. It is being offered on a 6.40 basis. The first call date is in 2025 at 100. Based on MSRB rules, the bond should be priced to

Answer: The 2025 call date Explanation: Since the bonds are yielding less than their coupon (6.40% basis vs. 6.80% coupon), the bonds must be selling at a premium. There is a good chance that the bond may be called on the first call date. (Interest rates are lower than when the original issue came out.) According to MSRB rules, if a callable bond with an in-whole call provision is selling at a premium, then the bonds should be priced to the first call date (on a yield to call basis)

A state agency is selling bonds in order to finance the construction of a low-income housing project. The interest on the bonds is not subject to either federal income tax or the alternative minimum tax. The low-income housing project is referred to as:

Answer: The conduit borrower Explanation: This is an example of a 501(c)(3) bond where the state agency is referred to as the conduit issuer and the 501(c)(3) organization is referred to as the conduit borrower. 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 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.

A new issue of municipal securities has just come to market via a negotiated underwriting. The spread for this issue is best defined as

Answer: The difference between the price paid to the issuer and the price initially offered to the public Explanation: The spread (or underwriting spread) is defined as the difference between the price paid to the issuer (the amount that the municipality receives per bond) and the price initially offered to the public (the amount that the underwriter receives when placing the bonds into customers' accounts). For example, a municipality might receive $990 per bond from the underwriter. The underwriter could place the bonds into customer accounts for $1,000. The $10 difference is known as the spread.

A revenue bond is backed by a pledge of net revenues. This indicates that

Answer: The first use of net revenues is to pay the debt service on the bonds Explanation: The flow of funds for a municipal net revenue issue requires that operating and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues.

A bond counsel will issue an unqualified legal opinion for a municipal bond issue to state that

Answer: There are no limitations or pending lawsuits that hinder the issuance of the bonds Explanation: A bond counsel renders an unqualified legal opinion if there are no situations in existence that could adversely affect the legality of the issue.

The formula for net interest cost (NIC)

Answer: [(Total Coupon Interest Payments - Original Issue Premium + Original Issue Discount) / Bond Year in dollars] In a competitive bidding process, the syndicate must submit a bid to the issuer in the form of either net interest cost or true interest cost. The NIC shows the total interest cost to the issuer over the life of the offering, plus any discount or less any premium

A zero-coupon bond has a duration

Answer: equal to the maturity Explanation: A zero-coupon bond has a duration equal to the maturity. The principal payment at maturity is the only cash flow the investor receives.

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

Answer: extraordinary call Explanation: 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.

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

Answer: limited tax bond Explanation: 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.

A municipal bond is currently trading at 92 and is callable in 10 years at par. What is the effective yield that must be disclosed on a customer's confirmation?

Answer: yield-to-maturity Explanation: The MSRB regulates the yield that must be disclosed on a client's confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.

Which of the following would have a fiduciary relationship with a state or local government issuer? A. A municipal securities dealer that will be bidding on a bond issue through a competitive underwriting B. A municipal advisor that will be providing financial advice to an issuer C. A municipal securities dealer that has been selected as the managing underwriter in a negotiated sale D. A credit rating firm that will be providing a credit rating to an issuer

B. A municipal advisor that will be providing financial advice to an issuer Explanation: Only municipal advisors have a fiduciary relationship with a state or local government issuer. Underwriters and credit rating agencies do not have a fiduciary relationship with municipal issuers.

A city is having difficulty making its bond payments and is considering bankruptcy. A municipal advisor assisting this issuer would review: A. Chapter 7 B. Chapter 9 C. Chapter 11 D. Chapter 13

B. Chapter 9 Explanation: A municipality declaring bankruptcy would file under Chapter 9. Chapter 7 is a corporation liquidation, Chapter 11 is a corporation restructuring, and Chapter 13 is a personal bankruptcy filing.

The DTCC is BEST described as a(n): A. Exchange catering to OTC equity securities B. Clearing service C. Trade reporting facility D. Trade surveillance system

B. Clearing service Explanation: The Depository Trust & Clearing Corporation (DTCC) provides clearing, settlement, and information services to broker-dealers who have an affiliation with this organization. The DTCC is not an exchange or trade reporting facility, nor does it provide transaction surveillance functions.

In a crossover refunding, the revenue stream originally pledged to secure the refunded securities: A. Is not pledged to the debt service on the refunded securities until they mature or are called B. Continues to pay the debt service on the refunded securities until they mature or are called C. Is committed to arbitrage transactions D. Is not used to pay interest on the refunded or refunding securities

B. Continues to pay the debt service on the refunded securities until they mature or are called Explanation: n a crossover refunding, the existing revenue stream continues to be used to pay the debt service until the refunded bonds are called or mature. At that time, pledged revenues cross over to pay the debt service on the refunding securities. During the period when both the refunded and the refunding securities are outstanding, interest expense on the refunding securities is paid from interest earnings on the invested proceeds.

All of the following would indicate a red flag, or negative trend, when analyzing the quality of a general obligation issue, EXCEPT: A. The existence of unfunded pension liabilities B. Debt limitations imposed on the community C. Increasing property taxes combined with decreasing population D. The market value of property in the community is decreasing

B. Debt limitations imposed on the community Explanation: Unfunded pension liabilities indicate less money is available than required to pay projected pensions. A decreasing population combined with increasing property taxes indicates less people are available to meet expected property tax requirements, and a decrease in the market value of property values in the community might be indicative of a negative economic trend. All are considered warning signs of a municipality's ability (or lack of) to pay their debt. Attempts to limit a municipality's debt would positively influence a general obligation bond as the municipality would be unable to exceed the debt limit, ensuring projected revenues service the debt.

An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT: A. Runway maintenance expenses B. Debt service expenses C. Hangar expenses D. Salaries of airport personnel

B. Debt service expenses Explanation: Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.

All of the following are benefits of a bond bank, EXCEPT: A. Reduce cost of funding B. Higher rates on deposits C. Higher credit ratings D. Greater marketability

B. Higher rates on deposits Explanation: A bond bank is an entity created by a state or agency to offer financing to smaller public entities such as cities, municipalities, schools, hospitals, or water and sewer districts. A bond bank buys issues of bonds directly from these entities and finances the purchases by issuing its own debt. Bond banks can also act as a lender to these small issuers. The debt issued by bond banks will usually have greater marketability. As a result, bond banks can typically issue debt at a lower cost than a smaller local entity and with a higher credit rating.

A municipal issuer using an independent registered municipal advisor regarding the issuance of municipal securities is 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 not required to be registered as a municipal advisor C. Is required to register as an investment adviser D. Is required to register with the MSRB

B. Is not required to be registered as a municipal advisor Explanation: 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 have.

If a municipality lowered the discount rate it used to calculate its pension liabilities A. Its pension liabilities would decrease B. Its pension liabilities would increase C. Its pension liabilities would not be affected D. This would lead to more uncertainty for bondholders

B. Its pension liabilities would increase Explanation: One of the most important components when analyzing a municipality's pension plan is its pension liabilities. The higher the discount rate used, the lower the pension liabilities. Some market professionals have commented that municipalities use too high a discount rate and this would create too low a value of pension liabilities. If a municipality lowered the discount rate it used to calculate its pension liabilities, this amount would increase and would lead to more certainty for bondholders.

Which of the following BEST defines the term private business use test concerning a private activity bond? A. Less than 10% of the proceeds of the issue will be used for a private use B. More than 10% of the proceeds of the issue will be used for a private use C. Less than 5% of the proceeds of the issue will be used for a private use D. More than 5% of the proceeds of the issue will be used for a private use

B. More than 10% of the proceeds of the issue will be used for a private use Explanation: The term private business use test is defined as more than 10% of the proceeds of an issue will be used for any 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)

Which of the following money-market instruments does NOT trade in the secondary market? A. Bankers' acceptances (BAs) B. Repurchase agreements C. Eurodollar CDs D. Directly placed commercial paper

B. Repurchase agreements Explanation: Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs, commercial paper, and BAs are traded in the secondary market.

Under federal tax law, which of the following is TRUE regarding 529 plans? A. A distribution may be made no more than once per year B. Rollovers are permitted once every 12 months C. Earnings are taxable if used for qualified higher education D. The beneficiary cannot be the donor

B. Rollovers are permitted once every 12 months Explanation: Federal law allows for rollovers between plans, changes in investment options, and earnings to grow tax-free if used for qualified education. Distributions may be made at any time at the discretion of the account owner. The beneficiary may include the donor.

Which of the following investments made with the proceeds of a tax-exempt offering would LEAST likely violate the Treasury arbitrage restrictions? A. A federal agency security B. State and Local Government Series (SLGS) securities C. A Treasury note D. A guaranteed investment contract (GIC)

B. State and Local Government Series (SLGS) securities Explanation: State and Local Government Series (SLGS) securities are special securities issued by the Treasury Department to state and local government entities (municipalities) upon request to assist them in complying with federal tax laws and Internal Revenue Service arbitrage regulations when they have cash proceeds to invest from their issuance of tax-exempt bonds. The other securities listed need to be purchased to have a yield that does not violate the Treasury arbitrage restrictions. Since the purchase price of these securities can vary based on the market and fees paid to brokers, they are more likely than SLGS securities to violate the IRS restrictions.

An investor has the following bonds in her portfolio: AA-rated 3% municipal with a 10-year maturity callable in 5 years @ 101, AA-rated 5% municipal with a 10-year maturity callable in 5 years @ 101. Which of the following statements about these bonds would most likely be TRUE? A. Both bonds have an equal chance of being called B. The 5% bond is more likely to be called C. The 3% bond is more likely to be called D. Both bonds will be called in 5 years

B. The 5% bond is more likely to be called Explanation: While both bonds appear to occupy the same spot on an AA yield curve, bonds with higher coupons are more likely to be called. In this case, the 5% bond is more likely to be called and would have greater call risk.

A municipality issues a bond backed by revenue from a project. If the municipality also has bonds outstanding that have the same claim against revenue, which of the following statements is TRUE? A. This is a double-barreled bond B. This is a parity bond C. This type of bond requires voter approval D. This type of bond would be taxable if the investor was subject to the alternative minimum tax

B. This is a parity bond Explanation: This is an example of a parity bond where two or more issues of revenue bonds have the same claim against revenue or are backed by the same pledged revenues. A double-barreled bond is backed by a source of revenue and the full faith and credit of an issuer that has taxing power, i.e., a general obligation (GO) bond issuer. General obligation bonds, not revenue bonds, require voter approval. Only the interest received from certain municipal private activity bonds is taxable if an investor is subject to the alternative minimum tax.

Which of the following statements would describe the purpose of an additional bonds test? A. To ensure that interest income will be considered to be exempt from federal taxes B. To ensure that revenue from a project is sufficient to cover debt service C. To ensure that current tax receipts would be sufficient to cover debt service D. To allow a municipality to issue bonds without requiring voter approval

B. To ensure that revenue from a project is sufficient to cover debt service Explanation: The additional bonds test is a requirement in many revenue 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.

A municipal advisor professional (MAP) residing in New Jersey would be permitted to make which of the following political contributions? A. A $350 contribution to a New Jersey gubernatorial candidate B. A $200 contribution to a Philadelphia, PA mayoral fund-raiser C. A $250 contribution to the mayor's reelection committee in her hometown D. None of the above

C. A $250 contribution to the mayor's reelection committee in her hometown Explanation: Municipal advisor professionals are limited to a maximum contribution of $250 per official, per election in which they are entitled to vote. An MAP is prohibited from making contributions in localities where she is not eligible to vote

A municipality wants to issue a bond and use the proceeds to retire an existing private activity bond that will mature in two years. As a municipal advisor, what advice would you give the municipality? A. Advise the municipality that this action would cause them to pay a rebate to the IRS B. Advise the municipality to issue the bond and invest the proceeds in State and Local Government Series (SLGS) securities that will mature in two years C. Advise the municipality that the IRS does not permit the bond issue to be refunded D. Advise the municipality that refinancing is recommended only if amount of debt can be reduced

C. Advise the municipality that the IRS does not permit the bond issue to be refunded Explanation: The IRS tax code disallows advance refunding of private activity bonds. The term refunding issue 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. This is an example of an advance refunding issue.

All of the following items are contained in the Introductory Section of a CAFR, EXCEPT: A. A List of Principal Officers B. A Letter of Transmittal C. An Auditor's Opinion D. An Organizational Chart

C. An Auditor's Opinion Explanation: The Auditor's Opinion is found at the beginning of the Financial Section of a Comprehensive Annual Financial Report (CAFR)

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 Explanation: 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 statements is NOT TRUE regarding an LGIP? A. There is a potential loss of principal B. LGIPs typically invest in short-term money market instruments C. Returns for LGIPs that invest municipal bond proceeds are typically guaranteed D. The risks associated with an LGIP are similar to those associated with a corresponding mutual fund

C. Returns for LGIPs that invest municipal bond proceeds are typically guaranteed Explanation: There are typically no guarantees associated with an LGIP.

Middleburg is planning to raise money to finance public purpose projects. They ask their financial advisor for advice as to how to structure the deal. It is known that the financial advisor believes that interest rates will soon begin to trend higher. The probable advice based upon this fact is to sell: A. Short-term notes B. Intermediate serial bonds with no term portion C. Serial bonds with at least one term maturity D. There is no valid reason why the financial advisor would determine that the type of financing is related to the trend of interest rates

C. Serial bonds with at least one term maturity Explanation: A financial advisor will judge the present and future needs of an issuer. Therefore, the advisor would attempt to structure an issue in such a way as to create the most favorable environment for the issuer based upon current interest rates and projected interest-rate trends. The question states that interest rates will be trending higher. Since these bonds are going to be for what appears to be capital expenditures, the most likely form the financing will take will be general obligation bonds. Normally, GOs contain at least a serial portion. Also, since we are going to be in a rising-interest-rate environment, we would like to sell bonds now with the longest possible maturity at the current lower rates. Thus, a term maturity will lock-in low-cost funds for an extended period.

An engineer whose clients are municipal issuers is meeting a potential new client. At the meeting, the engineer represents that she is a financial expert and, for a fee, can assist the issuer in its offering of municipal bonds. Which of the following statements is TRUE? A. The engineer would be violating SEC antifraud provisions B. The engineer would be permitted to engage in this activity without being considered a municipal advisor C. The engineer would be permitted to engage in this activity but would be considered a municipal advisor D. The engineer would be permitted to engage in this activity but only if his firm was registered as a municipal securities dealer

C. The engineer would be permitted to engage in this activity but would be considered a municipal advisor Explanation: An engineer generally is excluded from the definition of a municipal advisor when providing traditional engineering advice. This is true even if the advice is regarding the issuance of municipal securities or municipal financial products. The exclusion would not apply if the engineer held herself out as a financial expert or advisor regarding the issuance of municipal bonds. There is no prohibition against engaging in this separate activity, providing the engineer is registered as a municipal advisor.

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 Explanation: 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.

Riverton has issued $200 million of variable-rate debt, and enters into an interest-rate swap on the same notional amount with Town Bank. Riverton receives LIBOR and pays 3%. If LIBOR is 3.5%, what semiannual payment is required to be made? A. Riverton must pay Town Bank $3 million B. Riverton must pay Town Bank $6 million C. Town Bank must pay Riverton $500,000 D. Town Bank must pay Riverton $6.5 million

C. Town Bank must pay Riverton $500,000 Explanation: In an interest-rate swap, the cash flows are netted out. In this example, Riverton is paying a fixed rate of 3% to Town Bank, which equals semiannual interest of $3 million [($200 million x .03) / 2]. Town bank is responsible for a semiannual interest of $3.5 million [($200 million x .035) / 2]. The net amount is $500,000 that Town Bank must pay to Riverton.

MSRB rules specify formulas for calculating which of the following? A. Net interest cost B. True interest cost C. Yield-to-call D. Assessed valuation of property

C. Yield-to-call Explanation: MSRB rules specify the formulas for calculating dollar prices, yields, and accrued interest. Formulas for calculating the assessed valuation of property, net interest cost, and true interest cost are determined in most cases by the issuer

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 Explanation: The call protection provision of five years would be most valuable to a recent purchaser of the bond if 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.

If interest rates are expected to rise, which of the following securities would have the least amount of capital risk? A. A bond trading at a premium and callable in 20 years B. A bond trading at a premium and callable in 10 years C. A bond trading at a premium and callable in five years D. A bond trading at a premium and callable in one year

D. A bond trading at a premium and callable in one year Explanation: Capital risk is the risk that an investor will lose the principal or amount of monies invested. As interest rates rise, the value (price) of existing bonds will fall since the demand for existing bonds that offer lower interest rates will decline. If interest rates fall, the value (price) of existing bonds will rise since they are worth more than a new bond issued with a lower coupon. In other words, there is an inverse relationship that exists between market interest rates and existing bond prices. The prices of bonds with a longer term to maturity will rise or fall faster than bonds with a shorter term to maturity. Bonds that are selling at a discount (i.e., have a lower coupon) fluctuate more than bonds that are selling at a premium (i.e., have a higher coupon). Since all of the bonds listed are trading at a premium, the one with the least amount of capital risk is the bond with the shortest time to maturity.

Which of the following persons would not be considered a municipal advisor? A. A person making a recommendation to an obligated person regarding investing the proceeds of municipal securities B. A person recommending the brokerage of municipal escrow investments C. A person who provides advice on issuing debt that was tailored to address the specific needs and objectives of a municipality D. A person who provides information regarding a financial institution's currently available investments or price quotes for investments available for purchase and sale

D. A person who provides information regarding a financial institution's currently available investments or price quotes for investments available for purchase and sale Explanation: The SEC uses the term providing advice but excluded the provision of providing general information that does not involve a recommendation regarding municipal financial products or the issuance of bonds. If the advice given provides a recommendation, the SEC would consider the person making the recommendation a municipal advisor absent a specific exclusion. The SEC does not consider providing general information, which is objective and not specially tailored to the municipality or an obligated person, an example of a recommendation. Recommending the investments of a bond sale or an escrow would therefore be considered to be the functions of an advisor. Providing advice tailored to meet specific needs of an issuer would also classify an entity as an advisor. General information is excluded from the definition of advice General information would include, currently pricing, available securities, a person's professional qualifications and prior experience, general market and financial information (for example, market statistics regarding issuance activity for municipal securities, or current market interest rates or index rates for different types of bonds or categories of credits), factual information describing various types of debt financing structures, and factual and educational information regarding various government financing programs and incentives.

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 Explanation: 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

Which of the following actions would be an example of the use of fiscal policy to stimulate the economy? A. Intervention in the currency markets by the government to strengthen the U.S. dollar B. Action by the Federal Reserve Board to increase the money supply C. A decrease in the reserve requirement for banks D. An increase in spending by the federal government on new highway construction

D. An increase in spending by the federal government on new highway construction Explanation: Fiscal policy refers to decisions made by Congress on the level of taxation and spending by the U.S. government. An increase in spending or a decrease in taxation tends to stimulate the economy, while a decrease in spending or an increase in taxation tends to have the opposite effect. Actions taken by the Fed to influence the money supply are part of monetary policy, not fiscal policy.

A MIG rating applies to a A. Convertible bond B. Prerefunded utility bond C. ADR D. BAN

D. BAN Explanation: MIG (Moody's Investment Grade) ratings apply to municipal notes. A BAN (Bond Anticipation Note) is the only municipal note given

Which of the following Moody's ratings would be considered speculative? A. Aaa B. Aa C. Baa D. Ba

D. Ba Explanation: Certain ratings are called investment-grade. Investment-grade includes all bonds rated Baa up to and including Aaa. Anything that is under Baa is defined as speculative.

All of the following are types of overlapping debt, EXCEPT: A. The issuance of debt for an adjoining road district B. The issuance of debt for an adjoining school district C. Debt issued between two counties D. Debt issued between two states

D. Debt issued between two states Explanation: Debt issued between two states is not considered to be overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt would be for an adjoining road district or school district, or debt issued between two counties.

Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds? A. Increasing interest rates B. Stable interest rates C. Volatile interest rates D. Decreasing interest rates

D. Decreasing interest rates Explanation: Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.

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 A. I and II only B. I and IV only C. III and IV only D. I, II, III, and IV

D. I, II, III, and IV Explanation: 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 A. I only B. III only C. I and II only D. I, II, and III

D. I, II, and III Explanation: 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 of the following statements is TRUE concerning the continuing disclosure requirements of municipal issuers? A. The MSRB requires issuers to provide continuing disclosure information B. A dealer is required to provide continuing disclosure information to any client purchasing municipal securities C. Underwriters are required to provide dealers with continuing disclosure information D. Investors may access continuing disclosure information through the MSRB's (EMMA) Web site

D. Investors may access continuing disclosure information through the MSRB's (EMMA) Web site Explanation: Investors in municipal securities may receive continuing disclosure information on municipal issuers through the Electronic Municipal Market Access (EMMA) system. Many underwriting agreements require the issuer to provide continuing disclosure information, such as financial and operating information, to EMMA. Investors may access this information by viewing the Web site. A dealer is required to provide an Official Statement only in the primary market. MSRB rules do not apply to municipal issuers.

A town issues $10,000,000 of general obligation bonds in February with a serial maturity. Later that year it issues a $6,000,000 term bond issue, which is also a general obligation of the town. The term bonds are considered which of the following? A. Bank-qualified and tax-exempt B. Bank-qualified and not tax-exempt C. Non-bank-qualified and not tax-exempt D. Non-bank-qualified and tax-exempt

D. Non-bank-qualified and tax-exempt Explanation: If an issuer of general obligation municipal bonds reasonably expects to issue no more than $10,000,000 of bonds within a calendar year, the bonds are considered bank-qualified. If these bonds are purchased by a commercial bank, it may deduct a percentage of the interest it paid to borrow funds in order to purchase the bonds. Since the amount of bonds being issued exceeds $10,000,000 in a calendar year, the bonds are non-bank-qualified but are still tax-exempt.

All of the following are required continuing disclosures by an issuer or obligated person, EXCEPT: A. Substitution of credit or liquidity providers B. Release, substitution, or sale of property securing repayment of the securities C. Merger, acquisition, or sale of all the issuer assets D. Results of the most recent municipal elections

D. Results of the most recent municipal elections Explanation: 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—annual financial information and event disclosures. Issuers are also permitted to disclose certain information on a voluntary basis. Listed below are the specific required disclosures. 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 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

Which of the following actions would be MOST suitable for an issuer with floating-rate debt that believes interest rates will fall considerably in the near future? A. Refund all outstanding debt B. Purchase a receiver swaption C. Enter a vanilla swap as a payer D. Take no immediate action

D. Take no immediate action Explanation: An issuer of variable-rate debt would typically not want to refund debt in a falling interest-rate environment. The payer leg of a vanilla swap pays a fixed rate in exchange for receiving a floating rate. If interest rates were expected to fall, this would not benefit the issuer. Likewise, a receiver swaption (swap option) gives the right to enter into a swap in which the issuer would once again be paying a fixed interest payment in exchange for variable interest payments. Since the issuer has floating-rate (variable) debt outstanding and expects rates to fall, the best choice is to take no immediate action.

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

D. That has issued variable-rate debt to make its payments based on a fixed rate Explanation: 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.

When referenced to municipal debt, the term average life is BEST defined as: A. The weighted period of time required to repay the entire issue through scheduled principal payments B. When the mandatory sinking fund payments begin on a term bond issue C. The earliest period a term bond issue may be refunded D. The weighted period of time required to repay half of the issue through scheduled principal payments

D. The weighted period of time required to repay half of the issue through scheduled principal payments Explanation: The term average life when referenced to municipal debt is best defined as the weighted period of time required to repay half of the issue through scheduled principal payments. Another way of stating the term average life is to describe the average length of time that an issue with a mandatory sinking fund is expected to be outstanding. One simple method used to calculate the average life is the following formula: Average life = Total Bond Years (in dollars), divided by Total Amount of the Bond's Principal, where Bond Years is the number of bonds outstanding (in dollars), multiplied by the number of years to maturity. One bond year is one $1,000 bond outstanding for one year.

All of the following statements are TRUE concerning both auction-rate securities and variable-rate demand obligations, 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 Explanation: 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

If a municipal bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at:

a discount

A municipal advisor that voluntarily withdraws its registration with the MSRB must update its Form A-12:

within 30 days Explanation: A municipal advisor must update Form A-12 within 30 days if any information therein becomes inaccurate or if it ceases to be engaged in municipal advisory activities, whether voluntarily or involuntarily through a regulatory or judicial bar, suspension, or otherwise.