Chapter 3: Municipal Securities
A municipal finance professional eligible to vote in a municipality which frequently issues debt securities has made a contribution to the political campaign of one of the issuer's elected officials. More than which amount would disqualify the firm from engaging in certain municipal businesses with that issuer for 2 years? A) 250. B) 5000. C) 100. D) 1000.
A. 250 $250 is the maximum political contribution allowed under MSRB rules for those eligible to vote in the municipality issuing debt on a negotiated basis.
The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of: A) 500000. B) $1 million. C) 5000. D) 50000.
A. 500,000 1 mill = $.001. 10 mills = .01 (10 X .001). $100 million × 50% assessment rate = $50 million. $50,000,000 X .01 = $500,000.
Which of the following is NOT a source of revenue for a municipal revenue bond issue? A) Ad valorem taxes. B) Fees. C) Assessments. D) Tolls.
A. Ad valorem taxes Fund generators, such as tolls, assessments, and fees, subsidize revenue bonds. Ad valorem taxes support general obligation bonds.
Which of the following is contained in an official notice of sale? A) Amount of good faith deposit B) Agreement among underwriters C) Reoffering yields on the bond D) Delivery date
A. Amount of good faith deposit
Who has the final responsibility for debt service on an industrial revenue bond? A) Corporation leasing the facility B) MSRB C) Municipal issuer of the bonds D) Municipal authority established by the issuer
A. Corporation leasing the facility
Investment banks or bankers I. assist corporations in raising capital II. assist municipalities in raising capital III. accept deposits IV. make loans to individual customers A) I and II B) I and III C) II and III D) II and IV
A. I and II Investment banks and bankers assist both corporate and municipal issuers in raising capital by issuing securities to the investing public. Unlike traditional banks, they do not accept deposits or issue loans.
Which of the following would be considered in analyzing the credit worthiness of a revenue bond issuer? I. Per capita debt. II. Debt service coverage. III. Management. IV. Debt to assessed valuation. A)II and III. B)I and IV. C)III and IV. D)I and II.
A. II and III Revenue bonds are paid out of revenues from a particular project or facility, not from tax revenue. Therefore, debt service coverage and the personnel in charge of managing the facility are important. Overall debt of the issuer would be important in analyzing a general obligation bond backed by the issuer's full faith and credit.
What is a bank-qualified municipal issue? A) One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds. B) One considered safe enough for a bank to invest in-same as investment grade. C) An escrow receipt. D) One in which the bank guarantees the payment of interest and principal.
A. One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds A bank-qualified municipal issue is one that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry (issue) the bonds. An issue is qualified if it is for a public purpose and the issuer issues no more than $10 million in the calendar year of the issue. Bank qualified has no bearing on the quality of the issue.
Which of the following best describes how a syndicate determines the amount to bid for a new municipal issue? A) The average reoffering price minus the spread. B) The average sales price divided by the interest cost. C)The gross spread minus the takedown. D)The average reoffering price plus the takedown.
A. The average reoffering price minus the spread
The Bond Buyer's Revenue Index is which of the following? A)Yields of municipal revenue bonds with 30 years to maturity. B)A daily composite average of municipal revenue bond yields. C)A daily balance of municipal revenue bond prices. D)Yields of municipal revenue bonds with 20 years to maturity.
A. Yields of municipal revenue bonds with 30 years to maturity The Bond Buyer's Revenue Index is an average yield of 25 revenue bonds with 30 years to maturity.
An investor purchased a municipal bond at par to yield 5.5% to maturity. If, two years later, he sold the bond at a price equivalent to a 5% yield to maturity, the investor incurred: A) a capital gain. B) no taxable result at this time. C) a capital loss. D) taxable interest income.
A. a capital gain Because the investor sold the bond at a price that will yield less than the yield when he purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor incurred a capital gain-lower yield, higher price.
An underwriter should consider all of the following factors when determining the spread on a new issue EXCEPT: A) amount of the good faith check. B) type and size of the issue. C) prevailing interest rates in the marketplace. D) amount bid on the issue.
A. amount of the good faith check The amount of the good faith check deposited before bidding on the issue has no relevance to the bid or to the reoffering prices.
Municipal bonds known as dollar bonds are generally quoted: A) as a percentage of par B) yield to call C) net yield D) yield to maturity
A. as a percentage of par Although municipal bonds are usually quoted on a yield basis, actively traded bonds known as dollar bonds are often quoted as a percentage of par (price). The term dollar bond comes from the quote being in made in dollars. Remember that a percentage of par value ($1,000) equals a dollar price.
The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is a(n): A) divided account. B) Eastern account. C) proportionate underwriting. D) undivided account.
A. divided account This is part of an agreement for a Western (divided) syndicate.
If the State of Texas has solicited bids for a proposed municipal bond offering, the underwriters for that offering would be the syndicate that would A) sell the issue at the lowest cost to the State of Texas B) sell the issue at the lowest price C) sell the issue at the highest price D) generate the most proceeds for the State of Texas
A. sell the issue at the lowest cost to the State of Texas
All of the following municipal securities are quoted on a yield basis EXCEPT: A)term bonds. B)tax-anticipation notes. C)secured bonds. D)serial bonds.
A. term bonds Term bonds, or dollar bonds, are quoted like corporate bonds as a percentage of par. All other municipals are quoted in basis.
All of the following might lead to an industrial development bond being called EXCEPT: A) the municipality is approaching a statutory debt limit. B) interest rates are falling. C) the facility is destroyed by a storm. D) funds are available in the surplus account to call the bond.
A. the municipality is approaching a statutory debt limit Industrial development revenue bonds are not affected by issuer's statutory debt limits as they affect the issuance of GO bonds only.
The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is: A) the total takedown. B) the concession. C) the additional takedown. D) the total spread.
A. the total takedown The total takedown is that portion of the municipal underwriting spread that remains after the underwriting manager takes the management fee. The total takedown consists of the additional takedown and the concession.
All of the following sources of revenue could be used to service general obligation debt EXCEPT: A) user charges. B) ad valorem taxes. C) sales taxes. D) fines.
A. user charges Historically, municipalities get most of their revenues from property taxes (ad valorem taxes). Other sources of revenue include sales taxes, income taxes, gasoline taxes, license fees, fines, and assessments. User charges would be used to service revenue bonds.
An Eastern account underwriting of $100 million in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and sells out its allotment of $10 million. However, some of the other firms participating in the deal are not as successful, and $15 million of the bonds remain unsold. What is ALFA Securities' financial obligation? A) Pooled responsibility for $15 million. B) $1.5 million. C) 0. D) 150000.
B. $1.5 million Undivided liability in an Eastern account means this member is liable for 10% of the unsold bonds (10% × $15 million = $1.5 million).
A customer buys a 20-year 7% bond on a 7.35 basis. The bond is callable in 6 years at 103, in 8 years at 102, in 10 years at 101, and at par beginning in the 12th year. The customer's confirm will show yield to the: A)10-year call. B)20-year maturity. C)6-year call. D)12-year put.
B. 20-year maturity The confirmation of a bond trade must disclose the lower of yield to call or yield to maturity. This bond is being bought at a discount because the basis is higher than the coupon. Because the yield to maturity on a discount bond is lower than the yield to call, this is the yield that will be shown on the confirmation.
A couple's home has an assessed value of $40,000 and a market value of $100,000. What will the tax be if a rate of 5 mills is used? A) 2000. B) 200. C) 500. D) 5000.
B. 200 Use the assessed value of the home not the market value
Trade confirmations must show yield to call on which of the following bonds? A)6-½%,at par, maturing 2012. B)5-½%, 5% basis, maturing 2008. C)6-½%, 7% basis, maturing 2008. D)5-½%, at par, maturing 2008.
B. 5-1/2%, 5% basis, maturing 2008 Bond confirmations must disclose the lower of the yield to maturity or yield to call. On a premium bond, the yield to call is the lower of the two. The 5-½% bond with a 5% basis is the only bond trading at a premium because the yield to maturity (or basis) is lower than the coupon.
Who signs the agreement among underwriters for a municipal bond issue? A) Managing underwriter and bond counsel. B) All members of the underwriting syndicate. C) Managing underwriter and trustee. D) Managing underwriter and issuer.
B. All members of the underwriting syndicate All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.
Application for registration as a municipal securities registered representative must be accompanied by all of the following personal information EXCEPT: A) residences over the past 5 years. B) bank references. C) date of birth. D) employment record for the previous 10 years.
B. Bank references The request for registration must include the applicant's employment record for the past 10 years and residences over the past 5 years, among other information. Bank references are not required.
All of the following should be considered when creating a diversified municipal bond portfolio EXCEPT A) geographic location of the issuer B) denomination of the bonds included in the portfolio C) credit rating D) revenue source backing the bonds
B. Denomination of the bonds included in the portfolio
Which of the following types of municipal bonds is subject to statutory debt limits? A) Industrial development revenue (IDR) bonds B) General obligation (GO) bonds C) Special tax bonds D) Hospital bonds
B. General Obligation (GO) bonds
If a broker/dealer is acting as a financial advisor to a municipality, which of the following statements is TRUE? I. MSRB rules prohibit the broker/dealer from acting as an underwriter for the issuer unless they meet the criteria of specific allowable exceptions. II. The broker/dealer can act as both financial advisor and underwriter with no limitations. III. The broker/dealer may only act in an underwriting capacity if the underwriting agreement was done as a negotiated underwriting. IV. There are some underwriting functions that the broker/dealer in their advisory capacity may be allowed to participate in such as assisting with the preparation of the official statement. A) I and III. B) I and IV. C) II and IV. D) II and III.
B. I and IV If a broker/dealer has a formal advisory relationship with an issuer it may not generally act as underwriter for the issuers bonds. This applies regardless of whether the underwriting is a negotiated or competitive bid underwriting. There are exceptions, and some functions associated with underwriting that the MSRB rules do allow, but in those instances the broker/dealer could only be compensated for their advisory services and not be compensated for any underwriting services or related functions.
Which of the following terms refer to municipal bond underwritings? I. Standby. II. Best efforts. III. Preliminary prospectus. IV. Firm commitment. A) I and IV. B) II and IV. C) I and III. D) II and III.
B. II and IV Negotiated municipal underwritings can be performed on a firm commitment, best efforts or all-or-none basis. Standby underwritings are used only for corporate underwritings. The term preliminary prospectus, or red herring, refers to a corporate underwriting. In a municipal underwriting, the issue is described in the official statement or, if prepared, a preliminary official statement.
In what order are distributions paid under a net revenue pledge? The surplus fund. The debt service account. The operations and maintenance fund. The debt service reserve account. A) I, II, III and IV. B) III, II, IV and I. C) III, II, I and IV. D) III, IV, II and I.
B. III, II, I and IV Under a net revenue pledge operations and maintenance expenses are paid before all debt service. Therefore payments go out to cover expenses in the following order: (1) operating and maintenance expenses, (2) debt service, (3) debt service reserve, and (4) surplus.
Which of the following is least important to a municipal bond analyst? A) Debt service to annual revenues. B) Legality of the issue. C) Revenue collection record. D) Tax collection ratio.
B. Legality of the issue Municipal bond analysts are concerned with the financial aspects of municipal bonds to ensure that they do not default. Various financial ratios and collection records are critical to their analysis. The legality of the municipal issue, as determined by the legal opinion, is important to issuers.
Moody's Investment Grade (MIG) Ratings are applied to A) municipal bonds B) municipal notes C) money market instruments D) corporate bonds
B. Municipal notes Moody's Investment Grade Ratings are applied to municipal notes which are short-term municipal debts, such as bond anticipation notes (BANs).
Which of the following are directly backed by the U.S. government? A) Moral obligation bonds B) PHAs and NHAs C) Double-barreled bonds D) General obligation (GO) bonds
B. PHAs and NHAs Public Housing Authority and New Housing Authority issues are unique as municipal instruments because they are fully backed by the U.S. government.
All of the following terms are associated with general obligation (GO) bonds EXCEPT A) limited tax bond B) protective covenants C) voter referendum D) coterminous debt
B. Protective Covenants The protective covenants are found in the trust indenture of a revenue bond. Coterminous debt, or overlapping debt, exists when a single property is taxed by more than one taxing authority (i.e., property is taxed by both a school district and a county). Certain GOs may have limitations imposed on increasing any of the taxes that back them and are called limited tax bonds. GO bonds require voter approval.
TANs, RANs, GANs, and BANs are issued by municipalities seeking: A)financing for low-cost housing. B)short-term financing. C)special tax assessments for GO bonds. D)bond insurance.
B. Short-term financing Municipal short-term notes (tax anticipation notes, revenue anticipation notes, grant anticipation notes, and bond anticipation notes) are used as interim financing until a permanent long-term issue is floated or until tax receipts increase or revenue flows in.
All of the following statements regarding municipal revenue bonds are true EXCEPT: A)no debt limitation is set by the issuing municipality . B)the maturity of the revenue bond will usually exceed the useful life of the facility being built. C)the interest and principal are paid from revenue received from the facility. D)revenue bonds can be issued by inter- or intrastate authorities.
B. The maturity of the revenue bond will usually exceed the useful life of the facility being built Revenue bonds are usually structured so their maturity is shorter than that of the facility they were issued to build.
Under MSRB rules, if a municipal securities dealer has a financial advisory relationship with an issuer, which of the following statements is NOT true? A) The contract must set forth the basis of compensation. B) The relationship need not be disclosed in communications with the public pertaining to that issuer's securities. C) The contract must be in writing. D) The relationship must be disclosed to purchasing customers.
B. The relationship need not to be disclosed in communications with the public pertaining to that issuer's securities When a financial advisory relationship exists, it must be disclosed to all buyers of that issuer's securities, and in any advertising (communications with the public) relating to that issuer.
A municipal bond is offered at a discount. It has a 30-year maturity and is callable in 20 years at par. It is callable in 5 years at a premium and is puttable in 10 years at par. Which of the following yields would be quoted on this basis? A) Yield to the 20-year call at par. B) Yield to the 30-year maturity. C) Yield to the 10-year put at par. D) Yield to the 5-year call at a premium.
B. Yield to the 30-year maturity Bonds that sell at a discount are always quoted as yield-to-maturity. This is the lowest possible net yield that the investor would make by holding the bonds until the issuer redeems them.
If an indenture has a closed-end provision, this means that A)additional issues have no lien on the revenue stream B)additional issues will have junior liens C)a sinking or surplus fund must be established D)the bonds must be called before maturity
B. additional issues will have junior liens These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.
Disclosure to customers of control relationships is required in: A) primary distributions. B) all of these. C) agency transactions. D) principal transactions.
B. all of these Any control relationship must be disclosed to the customer.
All of the following statements regarding municipal bond official statements are true EXCEPT: A) the MSRB does not require the preparation of a final official statement for new municipal bond issues. B) an official statement must be delivered only upon request of a retail customer. C) a retail customer must receive an official statement no later than the settlement date. D) all retail purchasers of a new municipal bond issue must receive a final official statement.
B. an official statement must be delivered only upon request of a retail customer A final official statement must be delivered to retail buyers of a new issue on or before the settlement date. The MSRB does not regulate issuers, but does make this requirement of bond dealers.
The placement ratio, as shown in the "Bond Buyer", is: A) bonds issued/bonds unsold. B) bonds sold/bonds issued. C) bonds issued/bonds sold. D) bonds sold/bonds unsold.
B. bonds sold/bonds issued The placement ratio is a measure of investor demand for new issue municipal bonds. It is computed by dividing the amount of bonds sold each week by the amount issued that week.
The interest that municipal securities pay is: A) fully taxed. B) federally tax exempt. C) exempt from both state and local taxation. D) not taxed at the state, local, or federal levels.
B. federally tax exempt Interest paid on securities issued by municipalities is generally exempt from taxation at the federal level. It may also be exempt from state and local taxation if the purchaser resides in the issuing state.
All of the following regarding the official statement for a new municipal issue are true EXCEPT that it: A) meets disclosure requirements for purchasers of the new issue. B) is also called a prospectus. C) can be used to review the issuer's creditworthiness. D) must include information about the offering's call provisions.
B. is also called the prospectus The official statement is the disclosure document for each new issue of exempt municipal bonds. Although it is similar to a prospectus, these terms are not synonymous. The official statement commonly includes information about the call provisions of the bond, creditworthiness of the issuer, and other information potential purchasers should know before investing.
Information found in the Bond Buyer would include all of the following EXCEPT A)the placement ratio B)secondary market volume C)the 30-day visible supply D)REVDEX
B. secondary market volume The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains REVDEX, an index for revenue bonds as well as GO bond indexes. Additionally it includes the 30-day visible supply and the placement ratio.
A municipal bond underwriter looking in the bond buyer would recognize the percentage of new issues sold versus new issues offered for sale the prior week as A) the revenue bond index B) the acceptance or placement ratio C) the general obligation (GO) index D) the visible supply
B. the acceptance or placement ratio
A municipality that has issued GANs, short-term municipal notes, does so in expectation that the debt service will be paid by the receipt of funds attained: A) from future tax revenue. B) via grants from the federal government. C) through the issue of long-term bonds. D) from both tax and other anticipated revenue.
B. via grants from the federal government GAN stands for Grant Anticipation Note
A syndicate has won the bid for a general obligation bond of $1 million issued by a city. The syndicate has received the following orders: $500,000 net designated, $500,000 presale, and $1 million member at takedown. The orders would be filled as A) None to presale, none to net designated, $1 million to members. B) $500,000 presale, $250,000 net designated, $250,000 to members. C) $500,000 presale, $500,000 net designated, none to members. D) $250,000 presale, $500,000 net designated, $250,000 to members.
C. $500,000 presale, $500,000 net designated, none to members. Municipal syndicate customs dictate that presale orders have first priority, with group orders, net designated orders and member orders following in that order.
A Western account underwriting of $100 million in municipal bonds is established. A member firm agrees to underwrite 10% of the issue and sells out its entire allotment of $10 million. However, some of the other firms participating in the underwriting are unable to sell their full allocation, and $15 million of the bonds remain unsold. Regarding the underwriting firm who sold their entire allotment, what is their financial obligation? A) $1.5 million B) Pooled responsibility for $15 million C) 0 D) 150000
C. 0 Divided liability in a Western account means that if a member meets its commitment, it has no further liability for unsold bonds.
Which of the following quotes represents a municipal dollar bond quote? A) 8.20 - 8.00 B) 0.085 C) 85½ D) $850 - $870
C. 85 1/2
Under MSRB rules, which of the following would indicate a control relationship between a municipal dealer and an issuer? A)The dealer is engaged as an underwriter for the issuer. B)The dealer was an underwriter of the municipality's last issue. C)A dealer's officer sits on the issuer's board of trustees. D)The principal of the dealer lives within the municipality. .
C. A dealers officer sits on the issuer's board of trustees. A control relationship exists if someone represents both an issuer and municipal securities dealer.
You have a high-income client who wishes to maximize his after-tax interest income. Which of the following investments might NOT meet your client's objective? A) AA rated revenue bond. B) AA rated municipal note. C) AA rated IDB. D) AA rated GO bond.
C. AA rated IDB Industrial development bonds are private purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.
Long term securities issued by municipalities that use a Dutch auction method to reset short term interest rates known as "clearing rates" are: A)Real Estate Investment Trusts (REITs). B)American Depositary Receipts (ADRs). C)Auction Rate Securities (ARSs). D)Collateralized Mortgage Obligations (CMOs).
C. Auction Rate Securities (ARSs) Auction Rate Securities (ARSs) are long term securities issued by municipalities that use a Dutch auction to reset interest rates at short term intervals. The reset rate is known as the "clearing rate" and establishes the rate paid during the period following the auction.
Which of the following underwriting arrangements is associated with an invitation, typically found in The Bond Buyer, directed at investment bankers and broker dealers, intended to solicit interest in underwriting a new municipal issue? A) Negotiated B) All or none C) Competitive bid D) Best efforts
C. Competitive Bid
An example of overlapping debt would be a school district and A) A water pollution control facility B) a local utility power plant C) county general debt D) corporate debt of the county's largest employer
C. County general debt
The ratio of taxes collected to taxes levied might be used in the analysis of which of the following bonds? A)Water control. B)Pollution control. C)GO. D)IDR.
C. GO bond
The initial confirmation of a when-issued municipal bond contains which of the following? I. Number of bonds involved in the transaction. II. Settlement date. III.Yield to maturity. IV.Total dollar amount due. A) II and IV. B) I and II. C) I and III. D) III and IV.
C. I and III On a new municipal bond offering, where the customer receives a when-, as-, and if-issued confirmation, the final settlement date is not known; therefore, the amount of accrued interest is unknown (because it is payable up to but not including settlement). Thus, the total dollar amount is unknown because it includes accrued interest. The number of bonds purchased and the yield to maturity (price) are known and must be included on the confirmation.
In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue? I. Presale orders. II. Designated orders. III. Member orders. IV. Group net orders. A)III, II, I and IV. B)III, I, II and IV. C)I, IV, II and III. D)IV, II, I and III.
C. I, IV, II and III The standard order priority for municipal bond issue allocation as stated within the syndicate letter is: presale, group, designated, and member. Orders that benefit all syndicate members have the highest priority. Reference: 3.2.7.2 in the License Exam Manual
The visible supply includes all of the following EXCEPT: A)revenue bonds. B)GO bonds. C)municipal notes. D)industrial development bonds.
C. Municipal Notes Short-term notes are not part of the visible supply, which measures the dollar amount of new issues scheduled over the coming month.
While acting in a financial advisory capacity to a municipal issuer, a municipal securities dealer wants to be part of a syndicate in the underwriting of one of the issuer's new bonds. Which of the following statements regarding this situation is TRUE? A) The dealer must obtain the MSRB's written approval before signing the syndicate letter. B) The dealer would be allowed to participate and collect fees for both advisory and underwriting services supplied. C) Recognized by the MSRB as a potential conflict of interest, municipal rules generally prohibit a broker/dealer from acting in both capacities. D) Only an approval by the SEC could allow the broker/dealer to function in both capacities.
C. Recognized by the MSRB as a potential conflict of interest, municipal rules generally prohibit a broker/dealer from acting in both capacities
Which of the following bodies may NOT incur overlapping debt? A) Park and recreation department B) School district C) State government D) County highway department
C. State Government Only local government can have overlapping debt
Which of the following documents spells out the rights of each member of the underwriting syndicate and how the issue is allocated? A) Legal opinion B) Official notice of sale C) Syndicate letter D)Preliminary official statement
C. Syndicate letter
In its notice of sale in the "Bond Buyer", an issuer states that it will take into consideration the timing of interest payments when evaluating bids. The issuer will be using which of the following methods in its bid selection? A)Real interest cost. B)Low interest cost. C)True interest cost. D)Net interest cost.
C. True interest cost
A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show: A) coupon yield. B) yield to call (YTC). C) yield to maturity (YTM). D) current yield.
C. Yield to maturity Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.
A customer has written a letter of complaint to the dealer. On receipt of the complaint, a municipal securities dealer must first: A) notify the examining regulatory authority. B) refund any money to the customer making the complaint . C) accept the complaint and record the action taken. D) submit to arbitration.
C. accept the complaint and record the action taken On receipt of a customer complaint, the municipal securities dealer must accept the complaint, record the action taken, put it in a complaint file, and respond. Responses also become part of the complaint file.
The TIC method of evaluating municipal bids: A) can only be used for term bonds. B) is required by the MSRB if a financial advisory relationship exists. C) considers the time value of cash flows. D) is required by the MSRB if a control relationship exists.
C. considers the time value of cash flows TIC stands for True Interest Cost
The spread in a municipal competitive bid is the: A) difference between the stated yield and reoffering price. B) excess of the dollar bid over par. C) difference between the bid and production (the price at which the bonds are reoffered to the public). D) difference between the takedown price and reoffering price.
C. difference between the bid and production (the price at which the bonds are reoffered to the public) Bid refers to the winning bid and is the price the syndicate pays to buy the bonds from the issuer. The term "production" is a sales term and refers to the price at which the bonds are reoffered to the public. The difference between the two is the spread.
Which of the following is associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue A) competitive bid B) Eastern underwriting C) negotiated underwriting D) Western underwriting
C. negotiated underwriting
New Housing Authority (NHA) bonds are a relatively safe investment because: A) rental income provides a hedge against inflation. B) banks buy these bonds. C) the U.S. government guarantees a contribution to secure the bonds. D) they are backed by the full faith and credit of the issuing municipalities.
C. the U.S. government guarantees a contribution to secure the bonds NHAs are considered safe because, in addition to the backing of rental income, they are secured by a subsidy from an agency of the U.S. government. Thus, they are rated AAA.
A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that currently is yielding 8.7%. He is considering buying tax-exempt securities. What is the comparable yield for a municipal bond? A) 0.125 B) 0.1208 C) 0.0648 D) 0.06264
D. 0.06264 When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 8.7% × .72 = 6.264%. Remember to use the yield to maturity, not the coupon rate. The bond is currently priced to yield 8.7%. In this case, a tax-exempt bond yielding more than 6.264% will provide a higher after-tax return.
A customer in the 28% tax bracket wants to buy a municipal GO bond with a 7-½% yield that matures in 6 years; the tax-equivalent yield of this bond is A) 0.075 B) 0.026 C) 0.06 D) 0.104
D. 0.104 To calculate the taxable return this customer would need to equal the return of the tax-free municipal yield one would use the tax-free equivalent yield formula: Municipal bond yield / (1 − investor's tax bracket). Using this formula, .075 / (1 − .28) = .104 or 10.4%. This means the investor who is in a 28% tax bracket must earn 10.4% in taxable interest to equal the 7½% tax-free municipal interest yield.
A registered representative takes a customer order for a when-issued municipal bond. Payment is due A) on the next business day after issue B) 5 business days after the order is taken C) 10 business days after order is taken D) 2 business days after the bond is available from the issuer
D. 2 business days after the bond is available from the issuer When-issued means the security (a municipal bond in this case) will be forthcoming at some time in the future. The order can be taken now, but payment is not due until 2 business days (regular way settlement) after the bond is available from the issuer.
An abstract of a municipal securities issue official statement must be maintained on file for: A) 12 months. B) 5 years. C) There is no requirement to file abstracts of official statements. D) 3 years.
D. 3 years The MSRB requires firms to retain abstracts of official statements for 3 years, the same as all pieces intended to communicate with the public.
The dollar price used to compute the yield to call must be recorded on the confirmation of which of the following callable municipal bonds? A)8s 08 quoted at 8.0. B) 7s 05 quoted at 9.5. C)6s 07 quoted at 7.5. D)9s 15 quoted at 7.0
D. 9s 15 quoted at 7.0 D is the only one that the first number is greater than the second number
The dollar price used to compute the yield to call must be recorded on the confirmation of which of the following callable municipal bonds? A) 6s 07 quoted at 7.5. B) 8s 08 quoted at 8.0. C) 7s 05 quoted at 9.5. D) 9s 15 quoted at 7.0.
D. 9s 15 quotes at 7.0 For callable premium bonds quoted on a yield basis, the yield computed to the near term in-whole call is used. The confirmation shows the call date and call price as the expected maturity. The only bond shown quoted at a premium is 9s 15 quoted at 7.0.
An example of a taxable bond issued by a municipal government is: A) A tax anticipation note (TAN). B) A general obligation bond (GO). C) Series EE bonds. D) A Build America Bond (BAB).
D. A Build America Bond (BAB) Build America Bonds (BABs) are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.
Which of the following statements regarding a municipal variable rate demand obligation are TRUE? I. Interest payments are tied to the movements of another specified interest rate. II. Interest payments are tied to the movements of an underlying stock or index. III. the coupon rate stays the same for the life of the demand obligation and the price fluctuates. IV. the coupon rate of the bond changes and the price remains stable. A) II and III. B) II and IV. C) I and III. D) I and IV.
D. I and IV
Which of the following statements regarding revenue bonds issued by a state or municipality is TRUE? A) The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes. B) Interest and principal payment is backed by the full faith and credit of the issuer. C) Interest and principal payment is guaranteed. . D) Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve.
D. Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve
Which of the following municipal bonds may be paid by a state's legislative apportionment of funds to service the debt? A) Special assessment B) Industrial development revenue C) Special tax D) Moral obligation
D. Moral obligation Keyword: Legislative apportionment
Your firm is bidding on a new general obligation bond issue. As the issuer weighs and evaluates the competitive bids, what factor will be most important in deciding who will be awarded the winning bid? A) Takedown B) Scale C) Concession D) Net interest cost
D. Net interest cost
A registered municipal bond salesperson at your firm has obtained discretionary power for the account of a physician in Gloucester County, New Jersey. The customer is conservative, avoids investment risk, and seeks principal with long-term growth potential. Given the following choices, the salesperson would most appropriately invest the customer's money in: A) high-yield municipal bonds rated BB. B) Michigan Upper Peninsula revenue bonds rated AA . C) Delaware Wetlands Developments municipal bonds rated Aa. D) New Jersey Turnpike revenue bonds rated Aa.
D. New Jersey Turnpike revenue bonds rated Aa The customer lives in the state of New Jersey so a municipal bond from New Jersey would be the most appropriate investment
The interest on which of the following municipal securities may be considered preference income for alternative minimum tax purposes? A) Original issue discount bonds B) PHAs C) TANs D) Private purpose bonds
D. Private purpose bonds Interest on private activity municipal bonds is included in the taxable income of an investor who is subject to the alternative minimum tax.
Which of the following would have the least market risk? A) Corporate or municipal bonds with long-term maturities. B) AAA corporate debentures. C) Fannie Maes. D) Revenue anticipation notes.
D. Revenue anticipation notes Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).
All of the following are examples of short-term municipal obligations EXCEPT: A) TAN. B) BAN. C) TRAN. D) SLGS.
D. SLGS State and local government securities (SLGS) are issued not by a municipality but by the U.S. Treasury Department to assist local governments in complying with arbitrage restrictions imposed by the IRS. The other choices are examples of short-term funding used by municipalities.
A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why? A)The municipal bond because its equivalent taxable yield is 6.3%. B)The corporate bond because the after-tax yield is 6.25%. C)The corporate bond because the after-tax yield is 4.5%. D)The municipal bond because its equivalent taxable yield is 6.6%.
D. The municipal bond because its equivalent taxable yield is 6.6% This is calculated using the tax-equivalent yield formula; Municipal yield / (100% − investors tax bracket) 4.75 / (1 − .28) = 6.6%. By comparison, the 6.6% tax-equivalent yield of the municipal bond is higher than the 6.25% yield of the taxable corporate bond making the municipal bond the higher yielding investment given the investors 28% tax bracket.
Which of the following is the largest component of a municipal underwriting spread? A) Management fee B) Additional takedown C) Concession D) Total takedown
D. Total takedown Total Takedown = Concession + Additional takedown The underwriting spread is the entire amount. Total takedown is made up of the additional takedown and the concession which makes it the largest component. The management fee is the smallest.
Municipal securities issued by which of the following are triple-tax exempt? A) Public authorities. B) Hawaii. C) New York City. D) U.S. territories.
D. U.S. territories Guam, Puerto Rico, all of those are triple tax exempt
An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects: A) a when-issued transaction. B) a normal payment cycle on the bond of 7-½ months. C) a misprint in the official statement. D) a long coupon.
D. a long coupon This is a long coupon, and, after the first payment, subsequent payments will be made every 6 months.
All of the following items of information must be included in a municipal securities confirmation EXCEPT: A) the date of maturity that has been fixed by a call notice. B) the capacity in which the broker/dealer acted. C) whether the securities are fully registered or book entry. D) an extraordinary call provision.
D. an extraordinary call provision MSRB rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.
All of the following have an impact on the marketability of a block of municipal bonds EXCEPT the: A)price and date of call provisions . B)length of time until the bonds mature . C)quantity and quality of the bonds in the block available . D)dated date of the bonds in the block.
D. dated date of the bonds in the block Dated date has no affect on marketability
The MSRB is authorized to adopt rules concerning all of the following EXCEPT the: A)regulation of municipal securities advertising. B)sale of new issues to related portfolios. C)form and content of price quotations. D)information to be provided by municipal issuers.
D. information to be provided by municipal issuers The MSRB does not regulate issuers. Rather, it regulates the underwriting of municipal securities and subsequent secondary market trading. Disclosure requirements for issuers are mandated by the SEC.
A representative wishes to execute an order for a customer's discretionary account. The municipal dealer has a control relationship with the issuer of the security to be purchased. Under MSRB rules, the representative: A) must wait until the firm terminates the control relationship. B) may refer the customer to a firm that has no control relationship. C) may not execute the order. D) must have specific authorization from the customer.
D. must have specific authorization from the customer Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.
The unqualified legal opinion on a municipal bond states that: A) the bond has passed the additional bonds test (parity test). B) the bond is marketable. C) the issuer is creditworthy. D) the issuer has the authority to issue bonds that are legal, valid, and enforceable obligations of the issuer.
D. the issuer has the authority to issue bonds that are legal, valid, and enforceable obligations of the issuer Bond counsel attests that, to the best of its knowledge, the issuer has the legal right to issue the securities in question. In the case of tax-exempt bonds, the interest the issuer will pay on the bonds is exempt from federal taxation and the bonds are exempt from federal registration requirements. The legal opinion does not go to the issue's marketability, or safety, debt service requirements.
Typically, general obligation bonds are not sold short because: A) they trade over the counter. B) MSRB regulations prohibit short selling. C) they are backed by the full faith and credit of the issuing authority. D) thin markets may make it difficult to cover a short municipal position.
D. thin markets may make it difficult to cover a short municipal position Because the municipal trading market is thin, it is often difficult to cover (buy back) a municipal security that has been sold short. It is easy to short 100 shares of GM (borrow the stock), for example, because an equivalent 100 shares of GM can be purchased on the NYSE at any time.
Debt service is best described as the: A)total of the direct debt of a municipality and the debt of its political subdivisions. B)services provided by the paying agent for a bond issue. C)net interest on a new issue of a municipal bond . D)total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund.
D. total of interest and principal payable by the issuer plus any amount required to be deposited into a sinking fund
A registered representative mentions a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct? I. 6% is the bond's coupon. II. 6% is the bond's current yield. III. 6.5% is the bond's yield to maturity. IV. 6.5% is the bond's current yield.
I and III I. 6% is the bond's coupon III. 6.5% is the bond's yield to maturity When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.
Your customer, a small business owner likes investments that are short term, relatively safe from credit risk and liquid. He's heard that higher rates of return can be realized from auction rate securities than the rates he is currently getting on the Treasury bills in his portfolio. He asks you to explain them to him. Which of the following would you note as being reasons why they are not suitable for your customer? I. Auction rate securities are intended as long-term investments. II. Interest or dividend rates are reset at established intervals based on a Dutch auction. III. If the auction fails, holders of ARSs may not have immediate access to his funds. IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the time of the auction.
I and III I. Auction rate securities are intended as long-term investments III. If the auction fails, holders of the ARSs may not have immediate access to his funds
Which of the following statements regarding the suitability of municipal bonds are TRUE? I. The tax free interest payments make them more suitable for those in higher tax brackets. II. The tax free interest payments make them more suitable for those in lower tax brackets. III. The tax free interest is why municipal bonds are not considered suitable investments to be included in one's retirement account such as an IRA. IV. The tax free interest is one reason why municipal bonds are considered suitable investments to be included in one's retirement account such as an IRA.
I and III. Tax free interest is more suitable for those in higher tax brackets. Earnings in retirement accounts (IRAs) are already tax deferred and the impact of receiving tax free interest is lost or diminished
A legal opinion issued for a municipal bond covers which of the following? I. Feasibility of public works projects II. Creditworthiness of the issuing municipality III. Tax status of the municipal debt IV. The constitutionality and legality of the municipal debt
III and IV III. Tax status of the municipal debt IV. The constitutionality and legality of the municipal debt
Voter approval may be required for new bond issues for construction of which of the following? I. Airports II. Turnpikes III. State prisons IV. Public high schools.
III. and IV. III. State Prisons IV. Public High Schools Voter approval may be required for new issues of GO bonds. State prisons and public high schools are among the facilities for the public good that are built and supported by GO issues. User fees (like tolls) support revenue bond issues for construction of facilities, such as airports and turnpikes.
