Q&A Test 1

A municipality currently has an S&P AA rating. If the ratings service notifies the firm that it has been downgraded by one notch, its new rating would be: a. AA- b. A c. BBB d. BBB+

A

All of the following statements are TRUE concerning an auditor's report, EXCEPT a. It is an opinion of financial health b. It is an opinion of GAAP conformity c. A qualified opinion reflects a departure from GAAP d. It is found in the financial section of a CAFR

A An auditor's report, which is found in the financial section of an issuer's Comprehensive Annual Financial Report (CAFR), reflects the extent to which a financial statement is reported fairly in conformity with generally accepted accounting principles (GAAP). An auditor's report is not an opinion of financial health. An unqualified opinion (clean opinion) is a statement that financial statements are presented fairly in conformity with GAAP. A qualified opinion reflects departures from GAAP in certain sections, omission of information, exclusion of a portion of the government from the audit, or a lack of evidence provided to support certain information or notes. (87814)

An 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? a. It would be viewed as a $200 contribution from each party b. It would be viewed as a $400 contribution from the MAP c. It would be viewed as a $400 contribution from the spouse d. The contribution is exempt, since it covered post-election expenses

A Correct. 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. (8782

In which TWO of the following cases would a financial advisory relationship exist according to the MSRB? I. A dealer agrees to provide advice concerning the structure of a new issue in expectation of earning a fixed fee II. A dealer agrees to provide advice concerning the structure of a new issue in expectation of earning a sales concession III. A dealer earns a percentage fee for providing advice concerning the terms of a new issue IV. A dealer earns a percentage of the underwriting spread for providing advice concerning the terms of a new issue

A A financial advisory relationship is considered to exist when a broker-dealer or dealer bank, when receiving 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 advice to an issuer in its role as an underwriter. A sales concession or a percentage of the underwriting spread would be compensation received by a dealer when acting in the capacity of an underwriter.

Accrued interest for municipal bonds is computed on: a. A 30-day month and a 360-day year b. A 30-day month and a 365-day year c. Actual days elapsed and a 360-day year d. Actual days elapsed and a 365-day year

A Accrued interest for municipal bonds is computed in the same manner as for corporate bonds, which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-day year counting actual days elapsed. Accrued interest on all bonds is calculated from the last interest payment, up to but not including the settlement date.

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 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.

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 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 terms is associated with zero-coupon municipal bonds? a. Accretion b. Amortization c. Extendible maturity d. Low duration

A An investor who buys a zero-coupon municipal must adjust the cost basis annually for tax purposes. Since accretion is treated as federally tax-free interest income, there is no immediate tax consequence. The adjustment is only important if the investor sells prior to maturity. The accretion rate is based on the bond's yield to maturity at the time of purchase (the constant yield method).

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 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.

Which of the following situations may lead to basis risk? a. A mismatch between variable-rate debt service and the variable rate received from a swap b. The possibility that a swap may be cancelled prior to expiration c. A mismatch between the face value of outstanding debt and the nominal value of a swap d. A new tax code being adopted that decreases the highest federal tax bracket

A Basis risk refers to situations where the variable rate paid by an issuer on outstanding debt differs from the variable rate received from a swap. Potential cancelations are referred to as termination risk. Mismatches between face value and nominal swap values are referred to as amortization risk. A possible change of marginal tax rates is referred to as tax risk.

All of the following statements are TRUE concerning Variable Rate Demand Obligations (VRDOs), EXCEPT: a. Once the bank provides the credit enhancement, the security will be rated triple-A b. A bank will usually provide a letter of credit to provide short-term liquidity c. The municipal dealer is required to disclose the identity of the firm that is providing the credit enhancement d. The municipal dealer is required to disclose the credit rating of the firm that is providing the credit enhancement

A Correct. A type of long-term security that is marketed as a short-term investment is a variable rate demand obligation (VRDO). A VRDO will adjust its interest rate at specified intervals (daily, weekly, monthly) and, in many cases, has a put feature that allows the owner to sell (put) the security back to the issuer or a third party on the date that a new rate is established. A bank may issue a letter of credit (LOC) that provides the credit enhancement and short-term liquidity. A municipal securities dealer is required to disclose the identity and the credit rating of the firm that is providing the credit enhancement and any other relevant information. The credit enhancement will cause the ratings of the security to increase, but there is no guarantee it will receive a triple-A rating.

The IRS yield restrictions concerning municipal bonds would NOT apply under all of the following instances, EXCEPT: a. The municipality used the funds for working capital within two years b. The municipality used the funds for a capital project within two years c. The municipality used the finds for a reserve or replacement fund d. The municipality used no more than 5% of the proceeds to earn a material yield difference

A 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. • The proceeds are used within three years for a capital project or within 13 months for working capital. • The proceeds are used as part of a reasonable required reserve or replacement fund. • 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) are used to earn the material yield difference.

To calculate the net savings on a bond that was not rated with one that was rated, the formula is: a. Total interest cost of the nonrated bond − total interest cost of the rated bond less the cost of ratings b. Total interest cost of the nonrated bond − total interest cost of the rated bond plus the cost of ratings c. Total interest cost of the nonrated bond + total interest cost of the rated bond less the cost of ratings d. Total interest cost of the nonrated bond + total interest cost of the rated bond plus the cost of ratings

A In order to determine whether or not to rate a municipal bond, a comparison should be performed relative to similar securities. The objective is to justify the cost. Comparable securities would be similar issues generally within the same state, similar types of bonds (e.g., school district or water district), similar par value amounts of bonds, similar periods of issuance (the current interest-rate environment), and bonds with a credit risk similar to those of your client. The analysis would be done by taking the total interest cost on a recently sold nonrated bond and subtracting the total interest costs on the similarly issued rated bond to calculate the total savings due to the rating. Next, subtract the cost of the rating(s) to calculate the net savings, assuming the bond was rated.

Which of the following choices are the responsibility of the underwriting syndicate for a new municipal issue? a. To submit the official statement with EMMA b. To file the official statement with the SEC c. To submit the final official statement to FINRA d. To hire the bond counsel, who provides the legal opinion

A Municipal securities are exempt from SEC registration and filing requirements. However, the underwriters must submit the official statement to the MSRB's Electronic Municipal Market Access (EMMA) System. Official statements must also be provided to customers. The issuer hires the bond counsel. (66685)

The Bond Buyer Municipal Bond Index is based on: a. A 40-Bond Index b. Noncallable long-term bonds c. A cross section of zero-coupon bonds d. Diversified bonds with approximately 40 years to maturity

A The Bond Buyer Municipal Bond Index represents the average of the prices of 40 long-term municipal bonds adjusted to a yield of 6%.

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 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. Choice (a) is not permitted since more than one $60 gift card would exceed the $100 gift limit. (80564)

Which of the following would increase the debt service coverage ratio if a net revenue pledge is assumed? a. Gross revenue remains unchanged, the operating and maintenance expense remains unchanged, and the issuer refinances its existing debt at a lower rate b. Gross revenue declines and the operating and maintenance expense remains the same c. Gross revenue remains unchanged, the operating and maintenance expense remains unchanged, and the municipality issues new bonds d. Gross revenue declines and the operating and maintenance expense increases

A The coverage for revenue bonds is a ratio that is used to determine a municipality's ability to pay the annual debt service on its outstanding debt. Most issuers use a net revenue pledge which is calculated using the following formula: Net Revenues Debt Service Net revenues are equal to the gross revenue minus operating expenses. If gross revenue remains unchanged, the operating and maintenance expense remains unchanged, and the issuer refinances its existing debt at a lower rate, the coverage ratio would increase since the debt service would decline. The other choices listed would cause the debt service coverage ratio to decline.

An underwriter is submitting a bid of $1,020 on the following $3,000,000 serial issue. Par Years to Maturity Coupon $1,000,000 5 3.00% $1,000,000 6 3.50% $1,000,000 7 4.00%

A The net interest cost is found by calculating the total interest paid over the life of the offering, plus any discount or less any premium the issuer was paid, divided by the bond year dollar amount. To find the number of bond years, multiply the number of bonds ($1,000 units) within each maturity by the number of years to maturity. The total interest paid is found by multiplying the number of bond years by the annual interest for each maturity. 1,000 bonds x 5 = 5,000 bond years x $30 = $150,000 interest 1,000 bonds x 6 = 6,000 bond years x $35 = $210,000 interest 1,000 bonds x 7 = 7,000 bond years x $40 = $280,000 interest Total Bond Years = 18,000 Interest Paid = $640,000 This syndicate bid is being made at $1,020, a 2% premium to par. This premium ($3,000,000 x .02 = $60,000) would reduce the total amount owed by the issuer at maturity and would be subtracted from the total interest paid. $640,000 Interest Paid - $60,000 Reduced Cost = $580,000 Total Interest Cost. Bond Year Dollar Amount 18,000 x $1,000 = $18,000,000 Net Interest Cost = NIC NIC = $580,000 Total Interest Cost / $18,000,000 Bond Year Dollar Amount NIC = 3.22%

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

A 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.

All of the following are exempt from to the continuing disclosure requirements under SEC Rule 15c2-12, EXCEPT: a.An issue of less than $1,000,000 in principal amount b.An issue of bank-qualified bonds c.Bonds that are sold in denominations of at least $100,000 to no more than 35 investors d.Bonds that are sold in denominations of at least $100,000 with a maturity of nine months or less

B 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 Also exempt are 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. (87860)

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I.Current yield II.Nominal yield III.Yield to maturity IV.Yield to call

B A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.

A municipal securities dealer has been asked by the managing underwriter to participate in a syndicate that will be offering bonds of the Port Authority of New York and New Jersey. The dealer would not be permitted to join the syndicate as an underwriter under which of the following situations? a. The dealer will be offering the bonds only to investors who are residents of New York and New Jersey b. The dealer has a financial advisory relationship with the issuer c. The dealer had participated in a recent offering of the same issuer in the past two years d. The dealer employs individuals in the municipal bond department who were employed by the issuer within the past two years

B A financial advisory relationship exists when a municipal securities broker or dealer gives, or enters into an agreement with an issuer to give, financial advisory or consultant services regarding the issuance of municipal securities. A broker-dealer or municipal securities dealer that has a financial advisory relationship is prohibited from acting as an underwriter or joining a syndicate with respect to the same issuer of municipal securities. The other choices would not prevent the firm from joining the syndicate as an underwriter.

A future liability that a municipal government incurs for medical benefits to retired workers is: a. Unfunded pension liabilities b. Other Post Employment Benefits (OPEB) c. A Statement of Net Position d. A deferred inflow

B A future liability that a municipal government incurs for medical or other nonpension benefits to retired workers is referred to as Other Post Employment Benefits (OPEB).

A municipality has issued $50,000,000 worth of bonds and wants to deposit the funds in an investment providing safety and a rate for a fixed period. The issuer will be drawing down from this investment over a specified period and wants a specified rate. Which of the following would be recommended? a. Treasury bonds b. A guaranteed investment contract c. A reverse repurchase agreement d. A Build America Bond

B A guaranteed investment contract (GIC) is a secure investment that helps to preserve the principal of a municipal issuer that does not need all of the funds of a bond issuance right away. In other words, it's a type of investment for an issuer of municipal securities. The investment earns interest at either a fixed or a variable rate, or based on a predetermined formula. Most GICs offer a guarantee of original investment and interest payments as well as flexible terms of the length of the contract and frequency of interest payments (e.g., monthly, annually).

Which of the following statements is TRUE concerning the tax treatment of municipal bonds? a. If the bond was purchased at a premium, it will be accreted based on the constant yield method b. If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method c. The premium will not be amortized if the bond was purchased at a premium d. The discount will be amortized if the bond was purchased as an original issue discount (OID)

B A municipal bond purchased as an original issue discount (OID) is accreted (not amortized) each year for tax purposes based on a constant yield method (also called constant interest method), which uses the bond's yield to maturity. Municipal bonds purchased at a premium are amortized (not accreted) each year based on a constant yield method.

New issue municipal bond information is required to be sent to: a. FINRA b. NIIDS c. SEC d. SHORT

B According to MSRB Rule G-34, in order to act as an underwriter of municipal securities, a municipal securities dealer must register to use NIIDS (New Issue Information Dissemination Service). NIIDS was developed by the Depository Trust Corporation (DTC) to distribute information received from underwriters to help dealers meet the requirements for prompt reporting on municipal bond trades. SHORT (Short-term Obligation Rate Transparency) is used to collect information on VRDOs and ARS.

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 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.

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 discount and callable in 10 years b. A bond trading at a discount callable in 20 years c. A bond trading at a discount and callable in five years d. A bond trading at a discount and callable in one year

B 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 discount, the one with the greatest amount of capital risk is the bond with the longest time to maturity.

A feasibility study and engineering reports would be MOST necessary prior to a new offering for a: a. Limited tax bond b. Revenue bond c. Revenue anticipation note d. General obligation bond

B Feasibility studies are carried out to determine if revenues generated by a project will be sufficient to support its debt.

If a municipal securities dealer or institutional investor purchases bonds from an underwriter and immediately resells them to retail investors at a higher price, this is known as: a. Rebating b. Flipping c. A repurchase agreement d. A retail order

B 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.

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?

B 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. (77646

A municipal agency issues a bond with a value of $50,000,000. The bond would be considered a private activity bond under all of the following situations, EXCEPT: a. More than $2,500,000 of the proceeds was used to finance a loan to a private entity b. More than $2,500,000 of the proceeds was used for a private business c. More than $5,000,000 of the proceeds was used to finance a loan to a private entity d. More than $5,000,000 of the proceeds was used for a private business

B Incorrect. A municipal bond would be defined as a private activity bond under the following two circumstances. • If more than 10% of the proceeds of an issue will be used for any private business use and more than 10% of the principal or interest on the bond issue is made by or secured by payments or property used or to be used for a private business use, or • The amount of proceeds of the issue that is to be used to make or finance loans to persons other than governmental entities exceeds the lesser of 5% of such proceeds or $5,000,000. If the proceeds of the bond issue are $50,000,000 and the amount of the proceeds exceeds 10% ($5,000,000), or 5% of the proceeds ($2,500,000) was used to finance a loan to a private entity, the bond would be considered a private activity bond.

The tax rate on Treasury arbitrage issues is: a. 100% of the earnings b. 100% of the earnings that are materially higher than their cost of funds c. 50% of the earnings d. 100% of the excess earnings over their cost of funds

B Incorrect. If the issuer earns a return greater than its cost of funds, the excess will violate the IRS Treasury arbitrage restrictions. The tax rate on a Treasury arbitrage issue is 100% of the amount of earnings, which are materially higher than their cost of funds. (80655)

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 Incorrect. 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.

An investor buys $10,000 par value of 4% Treasury bonds due July 1, 2040. For tax purposes, the interest earned on these bonds is: I. Subject to federal income tax II. Exempt from federal income tax III. Subject to state income tax IV. Exempt from state income tax

B Interest on U.S. government bonds is subject to federal income tax but exempt from state income tax. This is just the opposite of the tax treatment on municipal (state) bonds where the interest is exempt from federal tax, but may be subject to state tax.

Smithfield public library has $22,000 of funds available for use, but has not as yet allocated these monies for any projects or applications. The library would like to invest these funds in a local government investment pool until the next board meeting in three weeks. If the library invests today, how much interest will it earn on its investment before the next board meeting? a. Zero interest since the money must be invested for at least one month b. Twenty-one days of interest on its investment c. One month of interest since interest is compounded monthly d. Ninety days' interest if the pool is buying three-month T-bills

B Like most money-market funds, LGIP interest is earned for the number of days that the funds are invested. The interest is typically paid monthly, but earned daily.

Local government investment pools allow local governments to manage their idle funds and take advantage of which type of interest rates? a.Tax-exempt bond rates b.Money-market rates c.Federal funds rate d.Interbank market rates

B Local government investment pools (LGIPs) allow local governments to invest at money-market interest rates. Historically, these municipal entities were prohibited from investing directly in money markets and LGIPs were created as an alternative to these direct investments.

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 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.

Jefferson County has issued $100 million of 3.5% fixed-rate debt. The County enters into an interest-rate swap on the same notional amount with First Bank. The County receives LIBOR and pays 4%. If LIBOR is 4.25%, what semiannual payments need to be made? I. Jefferson County must pay $1.75 million on its outstanding debt II. Jefferson County must pay $2 million to First Bank III. First Bank must pay $125,000 to Jefferson County IV. First Bank must pay $4.25 million to Jefferson County

B Regardless of the swap agreement, Jefferson County is still required to pay the semiannual interest of $1.75 million [($100,000,000 x .035) / 2] to its bondholders. In a interest-rate swap, the cash flows are netted out. In this example, First Bank is responsible for $2.125 million [(100,000,000 x .0425) / 2], while Jefferson County owes the fixed rate of $2 million [(100,000,000 x .04) / 2]. Subtracting the $2 million fixed sum from the $2.125 million floating sum results in a net payment from First Bank of $125,000 to Jefferson County.

A municipality would be able to issue bonds at a lower rate under which of the following conditions? a. The municipality's unemployment rate is increasing at a faster rate than the national rate b. The municipality's number of new residential construction 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

B 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 would be a negative factor.

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? a. Yield to call b. Yield to maturity c. Fixed yield d. Current yield

B 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 BEST defines the term municipal advisor? a. A person who provides advice to or on behalf of a municipal entity but not an obligated person with respect to municipal financial products or the issuance of municipal securities b. A person who provides advice to or on behalf of a municipal entity, or an obligated person with respect to municipal financial products or the issuance of municipal securities c. A person who provides advice to or on behalf of a municipal entity, or an obligated person with respect to municipal financial products but not the issuance of municipal securities d. A person who provides advice to or on behalf of a municipal entity, or an obligated person with respect to the issuance of municipal securities but not municipal financial products

B The SEC defines a municipal advisor as a person who provides advice to or on behalf of a municipal entity, or an obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues, or undertakes a solicitation of a municipal entity or an obligated person. The definition of a "municipal entity" is broad and includes issuers of municipal bonds (e.g., states, political subdivisions, municipalities, agencies, authorities, or other corporate instrumentalities of such entities). The definition applies to both advice given to a municipal entity and obliged persons, and advice with respect to financial products and the issuance of municipal securities.

A municipality will receive $200,000,000 from the proceeds of bonds issued for the benefit of a private entity. What is the maximum amount of the bond proceeds that may be used for issuance cost? a. $2,000,000 b. $4,000,000 c. $5,000,000 d. $10,000,000

B The amount of bond proceeds that may be applied to finance the costs associated with the issuance of qualified private activity bonds is limited to 2% of the proceeds of the bond issue ($4,000,000). Issuance costs include: underwriters discount, counsel fees, financial advisory fees, rating agency fees, trustee fees, agent fees (e.g., bond registrar, certification, and authentication fees), accounting fees, printing costs for bonds and offering documents, public approval process costs, engineering and feasibility study costs, and guarantee fees other than for qualified guarantees.

From first to last, the payment priority of a net revenue pledge is: I. The debt service fund II. The replacement and renewal fund III. The debt service reserve fund IV. The maintenance and operations fund

B The flow of funds of a revenue bond lists the payment priority and in a net revenue pledge, it is maintenance and operations, debt service, debt service reserve, and replacement and renewal.

Money put aside on a municipal revenue issue for the betterment and improvement of the facility is placed in the: a. Sinking fund b. Renewal and replacement fund c. Operating and maintenance fund d. Debt service fund

B The renewal and replacement fund holds monies put aside for the improvement of the facility.

All of the following documents would be expected to accompany the syndicate letter, EXCEPT the: a.Bid sheet b.Legal opinion c.Notice of Sale d.Preliminary official statement

B The syndicate letter (signed by all members of the underwriting) would not contain the legal opinion. The municipal bond attorney renders the legal opinion which is printed on the bond certificate itself, or is attached to the bond certificate under separate cover. It is usually rendered after the issue is priced. (66574)

A municipality issues $100,000,000 of 7% 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. Nine years later, rates have declined to 5% and the issuer would like to issue a new bond to capture the lower rate. The issuer sells $60,000,000 of 5% refunding bonds maturing in 8 years with a same type of principal repayments. What will the annual cost savings be once the original bonds are refunded? a. $800,000 b. $1,500,000 c. $2,500,000 d. $3,000,000

B The table below reviews the total annual payments of each bond. The 20-year bonds will have $5,000,000 of annual principal payments ($100,000,000 / 20) and the 8-year bonds will have $7,500,000 of annual principal payments ($60,000,000 / 8). Annual interest on the refunding issue is $3,000,000 ($60,000,000 x 5%). Annual Principal Payment $5,000,000 $7,500,000 Annual Interest Payment $7,000,000 $3,000,000 Total Annual Payment $12,000,000 $10,500,000 The annual cost savings is $1,500,000.

John manages the Municipal Underwriting Department at Consolidated Brokerage. He has made political contributions in the past and would like to contribute in the primary election to three incumbent candidates who have the authority to designate municipal bond underwriters in their jurisdictions. According to MSRB rules: a.John's firm would be prohibited from underwriting for those jurisdictions for two years if he makes any contributions b.John can give a total of $250 per election to each candidate, if John is entitled to vote for the candidates c.John can give $250 to each candidate in the primary election if he is entitled to vote for them but cannot make any contributions for the general election d.There is no limit to what John can give as long as his contributions are reported to the MSRB on Form G-37

B The two-year business ban under MSRB Rule G-37 is not triggered for political contributions by municipal finance professionals to issuer officials by municipal finance professionals if (1) the MFP is entitled to vote for the official, and (2) the contributions do not exceed $250 per candidate per election. (The primary and general elections are considered separate elections.)

All of the following are considered 501(c)(3) organizations, EXCEPT: a. A hospital owned by a religious organization b. An airline operating in the U.S. c. A retirement village created as a not-for-profit corporation d. A university that is a private not-for-profit institution

B 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. Since an airline is a for-profit corporation, it does not qualify as a 501(c)(3) organization. (71257)

Which of the following is NOT required on a bid form for a competitive municipal issue? a. The maturity structure b. Reoffering yields c. The principal amount at each maturity d. Either net interest costs or true interest cost

B When an issuer wants to sell bonds through a competitive bid, it will advertise by means of a Notice of Sale (NOS). Reoffering yields relate to the sale of bonds by the winning syndicate. They do not relate to the issuer and need not be included on the bid form. The other choices would be found in a NOS.

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

In a new municipal issue, what is a group order? a. An order placed by 3 or more members b. An institution purchasing bonds from a syndicate c. All members will benefit from the order d. A dealer buying for a group of investors

C There are four types of orders that can be placed with a syndicate. 1. A presale order is any order placed before the syndicate actually purchases the issue from the issuer. 2. A group order is when all members of the syndicate share in the profit. 3. A designated order is usually placed by a large institution which designates two or more members to receive credit for the sale. 4. A member order is any order placed by members for their customers.

An investor has purchased 25M Middletown IDRs that mature 7/1/35. The bonds are callable at declining premiums from 7/1/25. Additionally, the bonds may be put back to the issuer at par commencing on 7/1/23. Which TWO of the following statements are appropriate? I. The bonds must be held to maturity II.The bonds may be redeemed by the client at par on any coupon date commencing with 7/1/23 III. The investor has the option to continue to hold the bonds until they are called or mature IV. The bonds will be called at a premium, thus, the investor knows the bonds must yield more than the coupon rate

C A bond which may be "put" back to the issuer at the discretion of the holder of the bond is called a put option bond or demand bond. The option to put the bond is in the hands of the owner. The individual may decide to continue to hold the bond and not put it to the issuer, in which case the bond would be redeemed at maturity or when called. Choice (III), which says the investor has the option to continue to hold the bonds until they're called or mature, is true. It indicates in the question that the bonds are callable, meaning that even if you do not put it back to the issuer, it may be taken from you prior to maturity if the issuer decides to call the bonds. Choice (II), which states that the bonds may be redeemed by the client at par, is also true. This refers specifically to the put feature.

B.A. Securities is a subsidiary of B.A. Bank, which provides financial advisory services to Mercer County. B.A. Securities is considering bidding on a competitive underwriting offered by Mercer County. B.A. Securities is: a. Permitted to submit a bid if Mercer County allows them to bid b. Permitted to submit a bid if the financial advisory relationship between B.A. Securities and Mercer County is terminated c. Not permitted to submit a bid d. Permitted to submit a bid

C A broker-dealer that has a financial advisory relationship with an issuer is prohibited from acting as an underwriter with respect to the same issuer of municipal securities. The rule also applies to a firm that controls, or is under the control of a broker-dealer that has a financial advisory relationship with the issuer. This restriction applies to both competitive and negotiated underwritings.

A double-barreled municipal bond is backed by the: a. Revenues of a project b. Taxes of a municipality c. Revenues of a project and taxes of a municipality d. Revenues of the U.S. government

C A double-barreled municipal bond is backed by two sources of income, which would be the revenues of a project and the taxes of a municipality.

The following description of a type of municipal bond appears in an official Notice of Sale: "These are general obligation securities that are backed by the full faith and credit of the state or local government. The taxing power of the issuer is not specifically limited."

C A general obligation bond backed by the issuer's ability to tax with no limit on the amount of taxes that can be imposed is described as being unlimited in nature. (66480)

A municipality that allocates payment of a bond issue in which the combined annual payments of interest and principal are the same has a:

C 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.

A municipality's debt limit is the maximum amount of: a. Interest a municipality may pay out in one year b. Bonds a municipality may redeem in one year c. Debt a municipality may incur d. Debt that was issued based on the revenue derived from a municipal project

C A municipality's debt limit is the maximum amount of debt a municipality may incur and is important in the credit analysis of a general obligation bond. Choice (d) would be relevant for a revenue bond.

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 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. (87817)

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 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.

The term CUSIP: I. Refers to an automated trading system used in the corporate, government, and municipal markets II. Refers to a numbering system used to identify securities for various purposes, such as trading, record keeping, clearance, and settlement III. Stands for Centralized Unlimited System for Industry Processing IV. Is a number assigned to a security at the time a new issue is offered

C CUSIP stands for Committee on Uniform Securities Identification Procedures. Rule G-34 imposes requirements on municipal securities dealers to ensure that CUSIP numbers are assigned to municipal securities. Application to the CUSIP Service Bureau must be made in order to permit the numbers to be assigned by the business day on which the contract to purchase the issue from the issuer is signed (negotiated issues), or by the date of the award (competitive offerings).

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered: a. At par b. At a premium c. At a discount d. To yield 5 1/2%

C Correct. Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

Flipping in the municipal bond market has which of the following effects? a. The price of the bonds will decline b. The price of the bonds will be unchanged c. The price of the bonds will increase d. The municipal issuer will benefit

C 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 been 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 TWO of the following factors are important when conducting a comparable sales pricing analysis for a negotiated underwriting? I. A sampling of both general obligation bonds and revenue bonds should be used II. The issues should have the same ratings III. The issuer chosen should be located in the same state IV. The issues chosen should be based on sales that occurred within a six-month period a. I and III b. I and IV c. II and III d. II and IV

C 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. • The bonds should be the same type. G.O. bonds should not be compared with revenue bonds. • The issues should have the same or very similar ratings. • The issues should be located in the same state. The tax implications in California are different than in Texas. • The bond sales compared should take place on the same date, or as close as possible. The interest-rate environment can change very quickly. • 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.

Which of the following best describes the formula for net interest cost? a. (Total Coupon Interest Payments + Original Issue Premium + Original Issue Discount) / Bond Year in dollars b. (Total Coupon Interest Payments - Original Issue Premium - Original Issue Discount) / Bond Year in dollars c. (Total Coupon Interest Payments - Original Issue Premium + Original Issue Discount) / Bond Year in dollars d. (Total Coupon Interest Payments and not taking into account any premiums or discounts) / Bond Year in dollars

C 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. The formula is (Total Coupon Interest Payments - Original Issue Premium + Original Issue Discount) / Bond Year in dollars.

In a competitive sale, the end of the presale period is when all bids for the purchase of securities must be submitted to the: a. Syndicate manager b. Public c. Issuer d. MSRB

C In a competitive sale, the end of the presale period occurs when all bids for the purchase of securities must be submitted to the issuer. (77576)

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 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.

Which of the following statements is NOT TRUE of industrial development revenue bonds? a. They are issued by local municipal governments b. They may be used to finance the construction of commercial property that will be used by private corporations c. Their credit rating is determined by an analysis of the municipal government issuing the bonds d. Interest is paid from rents received from private corporations

C Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.

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 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.

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

C 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.

All of the following statements regarding the swap market are TRUE, EXCEPT: a. Swap dealers act as market makers b. Quotes may be based on the swap spread c. Most transactions take place on regional exchanges d. The ISDA creates standard documentation

C Swaps are over-the-counter derivative contracts. Swap dealers, acting as market makers, may quote prices based on a fixed rate, or on the swap spread. The International Swaps and Derivatives Association, Inc. (ISDA) creates the ISDA Master Agreement, which is the standard governing document used throughout the industry

The 30-Day Visible Supply of municipal securities refers to new municipal bonds that: a. Will be sold in the next 30 days through a negotiated sale of general obligation and revenue bonds b. Have been sold through a negotiated sale in the past 30 days c. Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds d. Will be sold in the next 30 days through a competitive sale of general obligation and revenue bonds

C The 30-Day Visible Supply of municipal securities refers to the face amount of new municipal bonds that will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds. It is an indication of expected supply in the new issue market and is published each day in The Bond Buyer.

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 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 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 concerning new issue municipal securities is TRUE? a. MSRB rules require all issuers to provide both preliminary and final official statements to all underwriters and other interested parties b. MSRB rules do not cover the official statement in any manner c. MSRB rules do not require the issuer to prepare an official statement however, if one is prepared, a copy must be given to each purchaser of the issue d. MSRB rules allow the substitution of an official notice of sale in lieu of an official statement as long as the underwriters attempt to provide adequate secondary market trading support

C The MSRB has no jurisdiction over issuers. However, it does have rules which tell MSRB members (your firm) what must be done concerning new issues being sold by the firm. Each firm that sells a new issue to a client must send the client an official statement, if one has been voluntarily furnished by the issuer. (66633)

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 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.

The real interest rate is best defined as the: a.Interest earned by an investor after taxes b.Interest rate earned that exceeds the prime rate c.Interest earned that exceeds the inflation rate d.Amount that the prime rate exceeds the discount rate

C The real interest rate received by an investor is the amount of interest received minus the inflation rate. If an investor is receiving a 10% interest rate when the inflation rate is 6%, the real interest rate is 4% (10% - 6%).

All of the following statements are TRUE concerning TEFRA approval for a private activity bond, EXCEPT: a. They may be approved by an elected body b. They may be subject to voter referendum c. They must be approved by the IRS d. They may be approved by an elected official

C Under TEFRA, a private activity bond must be approved. The approval may be the result of either a voter referendum or the decision of an elected official, or of an elected body of officials of the issuer. (87832)

Which of the following Moody's ratings would be considered speculative? a. Aaa b. Aa c. Baa d. Ba

D

Earnings that are generated in a Section 529 college savings plan: a. Are taxable in the year in which they are earned b. Are taxable to the donor when distributions are made c. Must be distributed and taxed to the beneficiary each year d. Accumulate on a tax-free basis as long as the money stays in the plan

D Once the contribution is made to a Section 529 plan, the investment grows tax-free as long as the money stays in the plan. As long as the beneficiary withdraws the money for qualified higher education expenses, the individual will not incur any federal tax liability. (66813)

A double-barreled security is a municipal security that: a. Is exempt from federal and state taxes b. Is exempt from state and local taxes c. Can be paid from the revenues of a project and is a general obligation of the U.S. government d. Can be paid from the revenues of a project and is a general obligation of a municipal government

D A double-barreled security is a municipal security that can be paid from the revenues of a project and is also a general obligation of a municipal government.

A firm responding to a request for proposal (RFP) or request for qualification (RFQ): a. Must be a registered municipal advisor b. Must be registered as a municipal securities dealer or underwriter c. Is not permitted to receive any compensation for responding to the RFP or RFQ d. Is not required to be registered as a municipal advisor

D A firm that is merely responding to a request for proposal (RFP) or request for qualification (RFQ) from a municipal entity or obligated person does not need to register as a municipal advisor. However, if the firm receives compensation (either directly or indirectly) in connection with its response, then it is an advisor and might need to register.

A municipality has issued $30,000,000 of debt that matures in five years. If in the first year the issuer allocates $6,000,000 toward the repayment of the debt, this is known as: a. A crossover refunding b. A net revenue pledge c. A level debt service d. A level principal

D A level principal occurs when the debt service payments have the same amount of principal payments over the life of the issue. A level debt service occurs when the combined annual amount of interest and principal payments remains relatively the same over the life of the issue of bonds.

A municipality borrowing for a short-term period to finance a capital project would issue: a. Commercial paper b. Tax anticipation notes c. Debentures d. Bond anticipation notes

D A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.

One of the major disadvantages of a Section 529 plan is that: a. There is federal taxation on qualified distributions b. The donor is unable to change beneficiaries in the plan c. The donor loses control of the principal investment d. The donor loses control of investment decisions

D An important consideration when establishing a Section 529 plan is the fact that the donor loses the ability to make investment decisions. The investments are usually made by the state administrator or a state designated administrator.

Which of the following items would NOT be considered an obligation of a municipality? a. Noncurrent liabilities b. ARC related to OPEB c. Compensated absences d. Conduit debt

D Conduit debt is issued to provide financing for a nongovernmental entity. The repayment of the debt is the responsibility of the beneficial entity and not the municipal issuer. Noncurrent liabilities are obligations of a municipality that are not currently due. ARC refers to the Annual Required Contribution to a municipality's pension of Other Post Employment Benefits (OPEB). Compensated absences are long-term liabilities related to future payments of unused leave, vacation, or sick days.

Joe Powell is an employee of Stevens and Company, a municipal securities broker-dealer. The firm is currently acting as a financial advisor to Smithfield, Rhode Island in respect to an upcoming new issue. Mr. Powell's activities are limited to checking the mathematical accuracy of bids received by the city for the issue and reporting these findings to the issuer. Which TWO of the following statements are TRUE? I. Mr. Powell would be required to register as a municipal securities representative because he is dealing with an issuer of municipal securities II. Mr. Powell's work would be considered clerical and ministerial, therefore, he would not be required to become registered III. Mr. Powell would be considered an associated person IV. Mr. Powell would not be considered an associated person

D In this case, the individual is not considered to be an associated person. Checking the mathematical accuracy of bids is a clerical and ministerial task and he therefore would not be required to be registered.

A MIG rating applies to a: a. Convertible bond b. Prerefunded utility bond c. ADR d. BAN

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

A municipal broker-dealer is prohibited from engaging in certain municipal securities business with an issuer for two years after political contributions are made to certain officials of the issuer by: a. A municipal advisor b. A PAC sponsored by an MFP c. An MAP d. All of the above

D MSRB Rule G-37 prohibits a firm from engaging in certain municipal securities activities with an issuer for two years after political contributions are made to officials of the issuer by: • The municipal broker-dealer • Any of the broker-dealer's municipal finance professionals (MFPs) • Any political action committee (PAC) controlled by the broker-dealer or an MFP • A municipal advisor • Any of the advisor's municipal advisory professionals (MAPs) • Any political action committee (PAC) controlled by the advisor or an MAP

Which of the following statements is TRUE concerning the supervisory and compliance system of a municipal advisor? a. The written supervisory procedures are not required to be amended to reflect changes in applicable rules and as changes occur in the municipal advisor's supervisory system if the advisor has fewer than 11 associated persons b. The advisor is required to designate at least two or more principals to be responsible for supervision c. The advisor is required to review and test its written supervisory procedures at least once every two years d. The advisor is required to designate a person to serve as its chief compliance officer

D MSRB Rule G-44 requires each municipal advisor to have a supervisory and compliance system that is reasonably designed to achieve compliance with all applicable securities laws and regulations. Some of the specific requirements are as follows. • To create and enforce written supervisory procedures that shall be promptly amended to reflect changes in applicable rules and as changes occur in the municipal advisor's supervisory system. These changes must be communicated to all associated persons promptly to whom these changes are applicable. • The advisor is required to designate one or more principals to be responsible for supervision. • The advisor is required to review and test its written supervisory procedures at least once annually. • The advisor is required to designate a person to serve as its chief compliance officer. Choice (a) is not true since there is no exemption from updating the advisor's supervisory system based on the size of the firm.

A municipal bond maturing on May 1, 2042 has a 7% coupon rate. The issue is callable at 104 beginning on May 1, 2022, scaled down one point every three years thereafter. From May 1, 2032 until maturity it is callable at par. On a transaction executed at a 6.25% yield, the dollar price shown on the confirmation will be the: a.Price to the call date of May 1, 2032 b.Price to the maturity date of May 1, 2042 c.Higher of price to call or price to maturity d.Lower of price to call or price to maturity

D MSRB rules require that, for transactions in callable securities effected on a yield basis, a dollar price must be shown and the calculation of that dollar price should be the lower of price to call or price to maturity. (89820)

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 only enough debt you anticipate will be purchased by investors seeking a fixed rate b. Hold off from issuing the debt until investor demand is sufficient c. Issue floating-rate debt and enter into a fixed-to-floating rate swap d. Issue floating-rate debt and enter into a floating-to-fixed rate swap

D 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

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 Participation in an LGIP is determined by individual state law, or the rules of the individual LGIP.

An investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, and also includes an agreement to supply investments on two or more future dates, is BEST defined as a: a. Swap b. Municipal escrow investment c. Repurchase agreement d. Guaranteed investment contract

D The SEC defines a guaranteed investment contract (GIC) as any investment that has specified withdrawal or reinvestment provisions and a specifically negotiated or bid interest rate, and also includes an agreement to supply investments on two or more future dates, such as a forward supply contract.

The resolution for a revenue bond would contain all of the following, EXCEPT: a. Insurance covenant b. Provisions to provide financial reports c. Additional bonds covenant d. Amount of the good faith deposit

D The bond resolution or indenture contains the covenants, flow of funds provision, and provisions to provide financial reports. The amount of the good faith deposit would be found in the Notice of Sale and Syndicate Letter. (70003)

An investor is considering purchasing 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 dirty price? a. $100,806 b. $101,750 c. $102,222 d. $102,694

D The clean price of a bond refers to its quoted price, which does not include accrued interest. The term 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 360-day year (85/360), which equals $944. The dirty price is equal to $102,694 ($101,750 + $944).

If general obligation bonds are to be analyzed, the credit analysis would be affected by which of the following factors? I. Feasibility studies II. The tax collection record of the municipality III. Debt Service Coverage Ratio IV. Evaluation of the debt to real estate values in the municipality

D The tax collection record and the debt to real estate value ratios are two factors that would be considered when analyzing general obligation bonds. The tax collection record informs the analyst of the tax bases being used by the municipality as a comparison of prior years tax bases and against other municipalities. The debt to real estate value ratios help the analyst study the relationship of debt to real estate valuation of the municipality and the municipality's ability to meet its debt compared with the real estate wealth of the municipality. Choices (I) and (III) apply to revenue bonds and would not be considered when analyzing general obligation bonds.

All of the following statements are TRUE concerning documentation requirements under Rule G-42, EXCEPT: a. Disclosure must include how conflicts of interest 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

D 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. (87808)

Interest rates have been rising and, as a result, municipal bond yields have been increasing. Which TWO of the following situations would likely occur? I.Call notices would be issued II.Put provisions would be executed III.Prerefundings of existing debt IV.Open market purchases of debt by their issuers

D When bond yields increase, the value of bonds decreases. As a result, the holders of debt would be more likely to exercise put provisions, forcing the issuer to retire the bonds at prices higher than the current market price. Issuers would also have the opportunity to retire their own debt by making open-market purchases at prices below par. Calls are not likely to occur as bonds are normally callable at a premium. Issuers are not likely to prerefund debt since the new debt would carry interest at higher rates than the existing debt.

All of the following statements are TRUE regarding an official statement for a new issue of municipal securities, EXCEPT: a. Issuers do not have to make an official statement available b. If one is prepared, an official statement must be filed with the SEC prior to the offering c. An official statement provides purchasers of the new issue with detailed financial information about the issue d. If an official statement is prepared, MSRB rules require that it be made available customers at or prior to settlement date

Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933. They cannot be required to prepare an Official Statement by the SEC, MSRB, or any other regulatory body. If one is prepared, it does not have to be filed with any regulatory body. The issuer will usually provide an official statement because the underwriting syndicate wishes to provide information to prospective investors and thereby help market the issue. The official statement is submitted to and made available through EMMA. (66936)