Debt

Which of the following ratings applies to commercial paper? I MIG 1 II P1 III P3 IV NP

C.

A customer purchases 5M of New York 8% G.O. bonds, maturing in 2042 at 90. The interest payment dates are Jan. 1st and Jul. 1st. The trade took place on Wednesday, February 2nd. How much accrued interest will the customer be required to pay the seller? A. $16.16 B. $33.33 C. $36.67 D. $66.67

C. Interest accrues on municipal bonds on a 30 day month/ 360 day year basis, with interest accruing up to, but not including settlement date. The trade took place on Wednesday, Feb. 2nd. Settlement occurs 2 business days after trade date. Therefore, settlement takes place on Friday, Feb. 4th. The last interest payment was made on January 1st, so the buyer owes the seller 30 days of interest for January and 3 days for February (up to, but not including the settlement date of February 4th). (33 days interest x $80 x 5 bonds) / 360= 36.67

The collateral backing private CMOs consists of: A. private placements offered under Regulation D B. mortgage bonds issued by corporations C. mortgage backed securities issued by government agencies and the bank-issuer D. mortgages on privately owned homes and apartments

C. Private CMOs (Collateralized Mortgage Obligations) are also called "private label" CMOs. Instead of being backed solely by mortgages guaranteed by Fannie, Freddie or Ginnie, they are backed by a mix of these agency mortgages and "private label" mortgages - meaning mortgages that do not qualify for sale to these agencies (either because the dollar amount of the mortgage is above their purchase limit or they do not meet Fannie, Freddie or Ginnie's underwriting standards). If the bank issuer wants to offer a CMO with a higher yield, it will increase the proportion of "private label" mortgages included in the CMO. Of course, along with a higher yield comes higher risk.

Construction Loan Notes are repaid from: A. rents received from the housing project built with the proceeds of the offering B. rent subsidies received from the U.S. Government C. monies received from a permanent take-out financing D. monies received from the issuance of the Construction Loan Note

C. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing).

Under MSRB rules, if a municipal dealer publishes a quote in Bloomberg as "BW" - Bids Wanted - for a block of revenue bonds, the dealer: A. must physically have the bonds in possession and available for regular way delivery B. is prohibited from selling those bonds short C. must intend to sell the bonds D. is obligated to accept the first bona-fide bid that it receives

C. If a municipal dealer places a quote as "BW" or Bids Wanted, the dealer is soliciting bids for certain bonds. He cannot do this just to get an idea of the worth of the bonds - there must be a bona-fide intention to sell those securities.

A customer in the 28% tax bracket is considering the purchase of a municipal bond yielding 8% or a corporate bond yielding 11.1%. Both bonds have similar maturities and credit ratings. Which statement is TRUE? A. The effective yield on the municipal bond is higher B. The effective yield on the corporate bond is higher C. Both effective yields are equivalent D. The coupon rates for each bond are necessary to determine the effective yield

C. In order to compare the tax free municipal yield to the taxable corporate yield, the two must be equalized. = tax free yield/ (100%- tax bracket) = 8% / (100% - 28%) = 11.1% Since the corporate bond is yielding 11.1%, the equivalent municipal yield is the same.

As stated in the flow of funds found in a revenue bond issue's trust indenture, monies to meet debt service requirements are deposited to the: A. Revenue Fund B. Debt Service Reserve Fund C. Sinking Fund D. Surplus Fund

C. Monies to meet debt service requirements are deposited to the sinking fund. The bondholders are paid their annual debt service requirements from this fund. The Debt Service Reserve fund is used for "extra" deposits above and beyond the annual requirement.

A customer buys a 10% G.O. bond at par. The issue is callable in 5 years at par and matures in 10 years. Which statement is TRUE? A. The yield to call is higher than the yield to maturity B. The yield to call is lower than the yield to maturity C. The yield to call is the same as the yield to maturity D. The nominal yield is higher than either the yield to call or yield to maturity

C. Since the bond is purchased at par, there is no premium to be amortized over the life of the bond nor is there a discount to be accreted over the life of the bond. Thus, the nominal yield and the yield to maturity are the same. If the bond is called early at par, again since there is no discount or premium, the nominal yield and the yield to call are the same. The yield to call will be higher than the yield to maturity if there is a substantial call premium or if the bond was purchased at a discount. The yield to call will be lower than the yield to maturity if the bond was purchased at a premium (which will be lost faster if the bond is called early).

Which of the following are necessary to calculate the total purchase price for a bond quoted on a yield basis in a municipal bond transaction? I Yield to maturity II Coupon rate III Settlement date IV Dated date A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

C. The dated date has no bearing on the calculation of the purchase price of a municipal bond. It is the date of issuance of the bonds, from which time interest will be paid. The other items are necessary to calculate the purchase price in a municipal bond transaction. To find the price, one must use the coupon rate, yield to maturity, and years to maturity. The settlement date is necessary to compute the amount of accrued interest that is due.

In order to construct a diversified municipal bond portfolio, which of the following would be considered? I The geographic location of the issuers II The credit rating of each issue III The denominations available of each issue IV The revenue source backing each issue A. I, III B. II, IV C. I, II, IV D. I, II, III, IV

C. When constructing a diversified municipal bond portfolio, one is trying to diversify away as much risk as possible. It would be logical to make sure that the portfolio is geographically diversified since having too great a concentration in one state or region is unwise if the local economy goes bad. A mix of credit ratings also helps to diversify the portfolio. Lower credit rated bonds give higher yields and make sense in a large portfolio, as long as the concentration is not too great. A mix of revenue sources also helps diversify away risk. The denominations of the bonds in the portfolio have no bearing on the risks inherent in those bonds.

Which of the following statements are TRUE about CMOs in a period of rising interest rates? I CMO prices fall slower than similar maturity regular bond prices II CMO prices fall faster than similar maturity regular bond prices III The expected maturity of the CMO will lengthen due to a slower prepayment rate than expected IV The expected maturity of the CMO will lengthen due to a faster prepayment rate than expected A. I and III B. I and IV C. II and III D. II and IV

C. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster.

Which of the following statements are TRUE regarding CMOs? I CMOs make payments to holders monthly II CMOs receive the same credit rating as the underlying pass-through securities held in trust III CMOs are subject to a lower level of prepayment risk than the underlying pass-through certificates IV CMOs are available in $1,000 denominations A. II, III, IV B. I, II, IV C. I, III, IV D. I, II, III, IV

D. Most CMOs make payments to holders monthly; though there are some issues that pay quarterly or semi-annually. CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificates. During periods of falling interest rates, prepayments of mortgages in a pool are applied pro-rata to all holders of pass-through certificates. CMOs divide the cash flows into "tranches" of varying maturities; and apply prepayments sequentially to the tranches in order of maturity. Thus, prepayments are applied to earlier tranches first, so the actual date of repayment of the tranche is known with more certainty. CMOs receive the same credit rating (AAA or AA) as the underlying mortgage backed pass-through certificates held in trust. CMOs are available in $1,000 denominations, as opposed to pass-through certificates that are $25,000 denominations. This makes CMOs more accessible to small investors.

The DSCR applies to: A. Mortgage bonds B. General obligation bonds C. CMOs D. Revenue bonds

D. DSCR stands for Debt Service Coverage Ratio. It is used to analyze municipal revenue bonds. It is the ratio of annual revenues available to pay debt service, divided by the debt service requirement. For example, if annual revenue available to pay debt service is $20,000,000; and the debt service requirement is $10,000,000 (this is both interest and principal); the debt service coverage ratio is 2X.

U.S. Government Agency securities are: I Quoted in 1/8ths II Quoted in 1/32nds III Traded with accrued interest computed on an actual day month / actual day year basis IV Traded with accrued interest computed on a 30 day month / 360 day year basis A. I and III B. I and IV C. II and III D. II and IV

D. Government agency securities are quoted in 32nds, similar to U.S. Government securities. Unlike U.S. Governments, on which accrued interest is computed on an actual day month / actual day year basis, Agency securities' accrued interest is computed on a 30 day month/360 day year basis.

Which of the following statements are TRUE regarding a 5% municipal bond purchased at par that has a put option at par? I The yield on the bond can fall below 5% II The put would be exercised if interest rates rise III The holder can receive 100% of par for the bond if he or she exercises the put option IV The investor can exercise the put at his or her discretion A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

D. If a bond has a put option at par, the holder can always exercise the put and "put" the bond back to the issuer, receiving 100% of par for that bond. Thus, as market interest rates rise, this bond's price will not fall, because it must always be worth par. Thus, such a bond is not susceptible to market risk. The yield on such a bond with a 5% coupon rate cannot rise above this level, because the price will not fall below par. However, the yield can drop below this level, because if interest rates fall, the bond's price will go to a premium and the put option would be worthless.

Below is a listing of municipal bonds with the same credit ratings and maturities. Which bond has the lowest yield? A. General Obligation Bond B. Public Purpose Revenue Bond C. Non-Essential Use Private Purpose Revenue Bond D. Puerto Rico Bond

D. Ranking the yields on these bonds from highest to lowest:Private purpose revenue bond would have the highest yield because its income is Federally taxable via the AMT - Alternative Minimum Tax. Public purpose revenue bond would have a lower yield because its interest income is exempt from Federal tax. A general obligation bond would have a lower yield than a public purpose revenue bond because it has greater safety; as well as being exempt from Federal tax. A Puerto Rico bond would have the lowest yield because its income is exempt from both Federal, State, and Local taxes for all investors, no matter where they live.

An elderly customer that is currently invested in bonds for income is concerned about declining yields due to record low interest rates. He has contacted his registered representative and inquires about purchasing a reverse convertible note on a Blue Chip stock because it offers a higher yield. The customer should be informed about all of the following EXCEPT the: A. note is not an obligation Blue Chip corporation B. note is subject to the credit risk of the issuing bank C. customer can potentially lose 100% of the principal amount due to a stock price decline D. "knock-in" price of the underlying security gives the customer the right to put the note back to the issuer at par at maturity

D. Reverse convertible notes were created for customers looking for enhanced yield in a low interest rate environment. Of course, any enhanced yield comes with higher risk. The note is linked to the price movements of an underlying stock (or very rarely, an underlying index). At maturity, the holder will receive par value, as long as the price of the reference stock is above the "knock-in" price (typically 70-80% of the initial reference price). On the other hand, if at maturity, the reference stock falls below the "knock-in" price, then the holder will receive the shares of stock. Thus, if the market price of the reference stock declines below the "knock-in" price, the customer receives the stock at maturity and not par value.A reverse convertible note is a structured product that is an obligation of the issuing bank - not the corporation or the corporate securities on which the product is based. As such, the note only as good as the credit of the issuing bank. Furthermore, if the market price of the stock declines to, or through, the "knock-in" price, the customer receives stock at maturity and that stock could potentially be worthless. The customer should be made aware of all of these points.

A municipal issuer has sold housing bonds to build subsidized housing, where the homeowners make the mortgage payments to the municipal authority. The homeowners begin to prepay their mortgages at a faster than expected rate. If this occurs, the issuer will retire outstanding bonds by making a(n): A. mandatory call B. extraordinary mandatory call C. optional call D. extraordinary optional call

D. Since the homeowners are prepaying their mortgages faster than expected, the issuer will use the excess monies to call in outstanding bonds, rather than continue to pay interest on them. This call results from an extraordinary event, and is at the option of the issuer. Hence, it is an extraordinary optional call.

Which of the following ratings are used for long term corporate and municipal bonds? I A II Aaa III B IV Caa A. I and III only B. II and IV only C. I, II, III D. I, II, III, IV

D. The "ABC" ratings are used for long term corporate and municipal bonds. The Aaa and the Caa are Moody's ratings. The equivalent Standard and Poor's ratings would be AAA and CCC, respectively.

During periods when the yield curve is inverted, all of the following statements are true EXCEPT: A. debt defaults are probably at historically high levels B. debt investors expect that interest rates will fall in the future C. debt investors expect that economic activity will decline D. issuers are likely to sell non-callable bonds

D. When the yield curve is inverted, short term rates are higher than long term rates. This typically occurs when the Federal Reserve pursues a "tight money" policy to slow the economy. The tightening of credit raises interest rates overall, slows economic activity, and thus business defaults increase. Long term rates remain lower than short term rates since investors do not expect the tightening to last far into the future. During periods when the yield curve is inverted, interest rates on all maturities tend to shift upwards, with short term rates rising the most. During these periods of high interest rates, issuers are likely to sell callable issues. If interest rates decrease in the future (as expected), the issuer can call in the old debt and refinance at lower current interest rates.

Corporate bonds are issued with an "anti-dilutive" covenant. If the corporation declares a 5% stock dividend, all of the following will be reduced EXCEPT the: A. market price of the stock B. conversion price of the stock C. parity price of the stock D. conversion ratio

D.When a senior convertible security is issued with an "anti-dilutive" covenant, should the company issue additional common shares, the terms of conversion are adjusted when the stock's market price is reduced for the dividend. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible is therefore increased. Since the parity price of the stock is: Par / Conversion Ratio, if the conversion ratio increases, the parity price of the stock will decrease as well.

Extraordinary mandatory call- Extraordinary optional call-

Extraordinary mandatory call- an example is a calamity call, that requires the issuer to call in the bonds if a facility built with the proceeds is destroyed extraordinary optional call- an example is a housing bond issue, where the revenues are mortgage payments. if prepayments occur faster than expected, the issuer has the option of calling in bonds with the mones, rather than continue to pay needless interest on the outstanding bonds

Which of the following would be considered when evaluating the credit risk of a municipal revenue bond? I Management experience II The effect of competing facilities III Coverage ratios IV Collection ratios

I, II, III. Credit risk is the risk that the bond will default. To evaluate this risk for a revenue bond issue, one would examine coverage ratios; the effect of competing facilities; and the management of the facility. Collection ratios are only used to analyze G.O. bonds. The collection ratio shows the percentage of property taxes assessed that are actually collected by the municipality.

The interest income earned from which of the following is subject to state and local tax? I Federal Farm Credit Funding Corporation Note II Real Estate Investment Trust III Ginnie Mae Certificate IV Fannie Mae Certificate A. I only B. III and IV only C. II, III, IV D. I, II, III, IV

II, III, IV. C. The interest income on U.S. Government obligations and most agency obligations is subject to Federal income tax but is exempt from state and local tax. This is the tax status for Federal Farm Credit Funding Corporation notes. However, the interest income on mortgage pass through certificates issued by Fannie Mae and Ginnie Mae is fully taxable. Income from REITs, since they are corporate securities, is fully taxable as well.

Money market instruments (8)

- CMBs (Cash Management Bills) - Treasury Bills - Commercial Paper - Banker's Acceptances - Negotiable Certificates of Deposit - Repurchase Agreements - Loan of Federal Funds - Loan of Eurodollars CTCBNRLL Cameron Took Care Bringing a Number of Real Life Loons

Debt: Corporate Debt: Convertible Debt; anti-dillutive covenant - - - -

- Convertible bondholders purchase their bonds with a fixed conversion price written in the bond contract. - If the corporation declares a stock dividend or stock split, this conversion price must be adjusted to prevent the value of the conversion feature from being diluted. - This protection takes the form of an "anti-dilutive" covenant found in the Trust Indenture. - Under an "anti-dilutive" covenant, if the corporation declares a stock split or stock dividend, the conversion price is reduced proportionately on the ex date - so that the bondholder is not hurt by this corporate action.

Definitions: Flow of funds- net revenue pledge gross revenue pledge

- Flow of Funds-the order in which income from a facility backing a revenue bond is to be collected and disbursed to pay the expenses of the facility and the debt service on the outstanding bonds. The "flow of funds" is stated in the bond contract and trust indenture - net revenue pledge- a covenant found in a revenue bond contract and Trust Indenture under which revenues from a municipal revenue bond are promised to be allocated in the following sequence: 1. operation and maintenance 2. debt service 3. debt service reserve and 4. operation and maintenance reserve account. It is called a "net" revenue pledge because interest and scheduled principal repayments on the bonds are paid from the net revenues that remain after operation and maintenance expenses are paid. gross revenue pledge- a covenant found in a revenue bond contract and Trust Indenture under which revenues from a municipal revenue bond are promised to be allocated in the following sequence: 1. debt service 2. operation and maintenance 3. debt service reserve and 4. operation and maintenance reserve account. It is called a "gross" revenue pledge because interest and scheduled principal repayment on the bonds are paid first, before all other expenses associated with the issue. Another name for this type of bond is a "gross lien revenue bond" - because the bondholders have claim to the gross revenues of the issuer, before any other payments are made

To construct a diversified portfolio of municipal bonds, the following must be considered: - - - -

- Maturities of varying lengths should be chosen to lessen interest rate risk; - Types of bonds must differ (G.O.s, Revenues, Special Tax) should be chosen to diversify credit risk; - issuer of bonds must differ and should be chosen to lessen credit risk; - Geographic regions should differ and should be chosen to reduce the risk of regional economic downturns causing a lowering of credit ratings. - MTIC- My titties itch greatly

Types of Corp. bonds are: - 1. 2. 3. - 1. 2.

- Secured Bonds 1. Mortgage Bonds 2. Equipment Trust Certificates 3. collateral trust certificates - Unsecured Bonds 1. debentures (convertible or non-convertible) 2. Income (adjustment) bonds

Definitions - debt service reserve fund - sinking fund

- debt service reserve fund- for municipal issues, a separate account established to receive any excess monies to be used to pay for annual debt service costs, after the required annual debt service payments have been made. - for municipal bond issues, a separate account where periodic deposits are made by the issuer to meet required debt service payments of both interest and principal

- CLN's are issued for? - length of life?

- issued to constrict a municioal building; once complete, the proceeds from a lonf-term bond sale are used to retire the notes - unlike other municipal notes, they have a very short life (2-3 years)

Municipal Debt: Trading: Secondary market joint account? - - -

- similar to new issue syndicates, in that they are a group of firms who pool their capital to buy a large block of bonds at a good price - the dealers reoffer these bonds in bloomberg for a profit - in bloomberg, only a single quote is permitted for the acocunt multiple quotes are prohibited, since there really is only 1 market in the bonds- that being the joint account

2 basic truths regarding bond price volatility 1. 2. therefor the most volatile bonds are _____________, __________________

1. the longer the maturity, the greater the bond price volatility 2. the lower, the coupon, the greater the bond price volatility - longer term, zero coupon bonds

All of the following are characteristics of municipal secondary market joint accounts EXCEPT: A. Good Faith Deposit B. Order Period C. Concession and Takedown D. Account Agreement

A. Municipal secondary market joint accounts are formed by two or more municipal dealers to distribute a large block of bonds in the secondary market. One of the participants acts as a manager. Municipal joint accounts are established under a written agreement between the account members; the agreement will specify that the manager has the right to establish concessions and takedowns; and can set an order period, similar to that used in primary market underwritings.During the order period, orders are accumulated and then tallied up at the period's end. The manager then fills the accumulated orders, usually on a "discretionary basis." If the issue is not sold out with these orders, the manager then accepts orders on a priority basis. There is no "good faith deposit" for secondary market joint accounts. Good faith deposits are required in primary market underwritings, since the issuer will not accept a bid without one.

To smooth out cash flow, a municipality will issue all of the following EXCEPT: A. BAN B. RAN C. TAN D. TRAN

A. Municipalities issue BANs (Bond Anticipation Notes) to "pull forward" funds that will be collected from a later permanent bond sale. These are isolated events, since municipalities do not sell bonds every day (unlike collecting taxes and revenues). For example, a municipality expects to float a 20 year bond issue in 6 months. It can get the funds today by issuing 6 month BANs now. When the bond issue is floated, the proceeds are used to pay off the BANs.

Coleco 11s22f A customer buys 5 Coleco bonds at the closing price, with settlement taking place on February 1st. The interest payment dates on the bonds are Jan 1st and July 1st. How much accrued interest will the buyer pay to the seller? A. $0 B. $9.17 C. $45.83 D. $275.00

A. The Coleco bonds are "11s22f"; 11% bonds maturing in 2022 which are trading flat. A bond trades flat (without accrued interest) when the issuer has defaulted on the interest payments. Therefore, a current bondholder receives no interest on the Coleco bonds.

The Federal Funds rate has been declining over the past few days. This is an indication that: A. the Federal Reserve Open Market trading desk has been performing system wide repurchase agreements B. the Federal Reserve Open Market trading desk has been performing system wide reverse repurchase agreements C. member banks have increased the borrowing of funds from the Federal Reserve at the discount window D. there has been a low level of competitive bids at this week's Treasury Bill auction

A. The Federal Funds rate is the interest rate charged between Federal Reserve member banks on overnight loans. The Federal Reserve can influence this rate through open market operations. If the Fed enters into repurchase agreements with member banks, it injects cash into the banks, which tends to drive the Fed Funds rate down. Conversely, if the Fed enters into reverse repurchase agreements with member banks, it drains the member banks of reserves, tending to drive up the Fed Funds rate. The results of the weekly Treasury auction would not have a direct influence on the Fed Funds rate; nor would member banks borrowing reserves directly from the Federal Reserve discount window.

A Treasury Bond is quoted at 95-3. The dollar price of a $1,000 par bond is: A. $950.94 B. $953.00 C. $953.75 D. $957.75

A. The bond is quoted at 95 and 3/32nds. 3/32nds = .09375, so the bond is quoted at 95.09375% of $1,000 par value = $950.94.

As stated in the flow of funds found in a revenue bond issue's trust indenture, before the revenues collected are applied to the operations and maintenance fund, revenues are placed in the: A. Revenue Fund B. Debt Service Reserve Fund C. Sinking Fund D. Reserve Maintenance Fund

A. The trust indenture of a revenue bond issue includes a "flow of funds" - meaning how revenues will be applied by the issuer. As revenues are collected, they are first deposited to a revenue fund. The monies are then applied, in sequence, to the operation and maintenance account; sinking fund; debt service reserve fund; reserve maintenance fund; renewal and replacement fund; and finally to the surplus fund.

Which of the following statements are TRUE regarding corporate obligations? I Corporate bonds are traded on the NYSE II Corporate bonds are not traded on the NYSE III Corporate bonds are traded over-the-counter IV Corporate bonds are not traded over-the-counter A. I and III B. I and IV C. II and III D. II and IV

A. Though a very small amount of corporate bonds are traded on the NYSE (in a separate trade matching computer), most of the trading volume takes place over-the-counter between corporate bond dealers such as Goldman Sachs and other firms.

A hospital has been financed through a revenue bond issue containing a Net Revenue Pledge. Prior to paying Debt Service, all of the following expenses would be deducted by the issuer EXCEPT: A. Depreciation and amortization B. Garbage disposal costs C. Wages D. General expenses

A. Under a Net Revenue Pledge, operation and maintenance is funded before Debt Service is paid. This is accounted for on a cash basis. Thus, operating costs such as garbage disposal transport, wages, and general and administrative costs are funded before monies go to pay Debt Service. Depreciation and amortization are non-cash expenses and are not counted.

A municipality has a G.O. bond debt limit of $500 million. It has $300 million of G.O. debt outstanding. It now wishes to issue another $100 million of G.O. bonds. The new debt issue is known as a(n): A. Junior lien debt B. Parity bond C. Par bond D. Senior lien debt

B. A municipal "parity" bond is one that has an equal claim on tax collections or revenues as other obligations of that issuer. For example, 2 issues of revenue bonds of the same issuer are on parity with each other if the same pledged revenues are the security for each bond issue. In contrast, a double barreled revenue bond is a revenue bond that is additionally backed by that municipality's ad valorem taxing power if there is a revenue shortfall. Thus, aside from the revenue pledge, these are additionally backed by a general obligation pledge of "full faith, credit and taxing power."

A 5 year $1,000 par 3 1/4% Treasury Note is quoted at 100-12 - 100-16. The note pays interest on Jan 1st. and Jul. 1st. A customer buys 1 note at the ask price. What is the current yield, disregarding commissions? A. 3.13% B. 3.23% C. 3.25% D. 3.45%

B. The bond is purchased at 100 and 16/32nds = 100.50% of $1,000 = $1,005. The formula for current yield is:

A 10 year 8% municipal bond, quoted on a 6.00 basis, is priced at 105. A 10 year 7% municipal bond, quoted on a 6.00 basis, is priced at 101. What is the price of a 10 year, 7.2% municipal bond, quoted on a 6.00 basis? A. 101.25 B. 101.80 C. 102.05 D. 102.20

B. This question is asking for the following: 8%Coupon6.00 Basis1057.2%Coupon6.00 Basis?7%Coupon6.00 Basis101 The difference in price between the 7% and 8% bonds is 4 points. The 7.20% bond is 20% of the way from 7%. 20% x 4 points = .80 point price increment from the 7% price. 101 + .80 = 101.80 price for the 7.20% bond.

Moody's Investment Grade (MIG) rating is used for: A. Municipal long term bonds B. Municipal short term notes C. Corporate long term bonds D. Corporate short term notes

B. "MIG" stands for Moody's Investment Grade and is the rating used for short term municipal notes. Short term corporate obligations are rated "P" (Prime). Both long term corporate and municipal offerings are rated on an "ABC" scale.

A basis quote for a $10,000 municipal bond with one year left to maturity has just been raised by 20 basis points. The bond's change in price will be: A. $20.00 increase B. $20.00 decrease C. $200.00 increase D. $200.00 decrease

B. 1 Basis Point = .01% = $.10 therefore 20 basis points equals .20% of par .20% = .002 x $10,000 par = $20. If interest rates rise by 20 basis points, this bond with 1 year to maturity should decrease in value by $20. Also note that this type of question can only be asked for a bond with 1 year to maturity. If there are many years to maturity, then discounted cash flow calculations are required, which are not tested.

A 7% general obligation bond matures in 1 year. A municipal dealer quoting the bond has just changed his quote from a 6.85 basis to a 6.95 basis. The approximate dollar change in price per $1,000 bond is: A. $.10 B. $1.00 C. $10.00 D. $100.00

B. 100 basis points equals 1 point on a bond = 1% of $1,000 par = $10.00 in interest per year. Since this bond has only 1 year to maturity, a 100 basis point change in quote (1 point) will equal a $10.00 change in price. This quote is being changed by 10 basis points (from 6.85 basis to 6.95 basis), so the approximate price change on this 1 year bond is $1.00.

Mandatory sinking funds for municipal issues are: I found in revenue bond issues II not found in revenue bond issues III found in general obligation bond issues IV not found in general obligation bond issues A. I and III B. I and IV C. II and III D. II and IV

B. A bond issue is likely to have a mandatory sinking fund if it is perceived as a risky issue, causing prospective purchasers to demand additional safeguards on their investment. Since G.O. bonds are backed by unlimited taxing power of the State, they are perceived as low risk (not needing a sinking fund). Revenue bonds are backed by the facility's revenues and are considered somewhat risky. These are the issues that are likely to have a mandatory sinking fund requirement.

All of the following statements are true about "Build America Bonds" EXCEPT: A. the issuer gets a federal tax credit equal to 35% of the stated interest rate on the issue B. the interest is federally tax exempt C. the bonds give municipal issuers access to the conventional corporate debt market D. the proceeds of the bond issues can only be used for infrastructure improvements

B. Build America Bonds (BABs) were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the broader corporate debt market (which includes international investors who do not participate in the municipal market) for needed capital projects.

From an issuer's standpoint, as the years progress, "level debt service" serial bond issues have: I Decreasing interest payment amounts II Increasing interest payment amounts III Decreasing principal repayment amounts IV Increasing principal repayment amounts A. I and III B. I and IV C. II and III D. II and IV

B. Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule). Since bonds are retired annually, the amount of the payment representing interest declines annually. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases.

Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to: A. meet a temporary cash shortage due to unforeseen extraordinary expenses B. refund an outstanding bond issue C. provide construction period financing that will be permanently financed by a future bond sale D. smooth out collections of funds that are normally subject to seasonal fluctuations

B. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.

The effective Fed Funds Rate is the: A. rate charged by the largest members of the Federal Reserve System B. averaged rate of member banks throughout the United States C. highest rate charged by member banks, calculated on Wednesdays D. lowest rate charged by member banks, calculated on Wednesdays

B. The effective Federal Funds Rate is the average daily rate charged by member banks for overnight loans of reserves. - the lowest interest rate in the economy - it is the average rate for federal reserve member banks from across the U.S.

All of the following statements are true about Treasury Receipts EXCEPT: A. Treasury Receipts are U.S. Government bonds stripped of coupons B. Tax on interest earned is deferred until maturity C. Interest and principal are paid at maturity D. Tax on interest earned is due annually

B. Treasury Receipts are U.S. Government bonds which have been stripped of coupons. The discount must be accreted annually, and the accretion amount is taxable as interest earned for that year. However, no monies are received from the issuer until maturity, when the security is redeemed at par. At this point, the owner receives the face amount but has no tax consequences (since the discount was taxed over the life of the bond).

Which of the following corporate bonds are secured? I First mortgage bonds II Second mortgage bonds III Guaranteed bonds IV Equipment trust certificates A. I and II only B. III and IV only C. I, II and IV D. I, II, III, and I

C I, II, &IV. Secured bonds are backed by a pledge of physical collateral - the lender can seize the collateral if the borrower defaults. First and second mortgage bonds are backed by a pledge of real property; equipment trust certificates are backed by a pledge of tangible property (railroad cars, trucks, airplanes, etc.) Guaranteed bonds are not backed by a pledge of collateral - they are guaranteed by a second party who typically has a better credit rating than the issuer - so the issue can be sold at a lower interest rate