Debt Securities: Municipal Bonds
A municipality has a tax rate of 9 mills. A piece of real property in the municipality is assessed at $150,000 and has a fair market value of $155,000. The annual tax liability on the property is: A. $1,350 B. $1,395 C. $13,350 D. $13,950
$1,350 One mill = .001; 9 mills = .009. Taxes are based on assessed valuation, not fair market value. .009 x $150,000 = $1,350. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.
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 Tuesday, February 1st. 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
$36.67 33 days interest x $80 x 5 bonds / 360 = $36.67
A customer purchases 5M of New York 3% G.O.'s maturing in 2042 at 90. The interest payment dates are Jan 1st and Jul 1st. The trade took place on Tuesday, Feb 1st. How much will the customer pay for the bonds, excluding commissions and accrued interest? a. $850 b. $1,000 c. $4,500 d. $5,000
$4,500 90% of $5,000 par
Which of the following municipal bonds would most likely be refunded by the issuer? a. 5% G.O., M'36, callable in 2016 at par b. 6% G.O., M'36, callable in 2016 at 102 c. 7% G.O., M'36, callable in 2016 at 102 d. 8% G.O., M'36, callable in 2016 at par
8% G.O., M'36, callable in 2016 at par
A bond counsel would render a qualified legal opinion in which of the following circumstances? I. After examining the city property records, it appears that clear title cannot be given to land on which a proposed facility is to be built II. The issue has not been registered with the Securities and Exchange Commission and is being offered without a prospectus III. The feasibility study projects revenues for a new dormitory without taking into account the impact of competing facilities nearing completion IV. The interest on the bonds may be taxable based on preliminary IRS regulations
After examining the city property records, it appears that clear title cannot be given to land on which a proposed facility is to be built The interest on the bonds may be taxable based on preliminary IRS regulations
Which statements are TRUE regarding the legal opinion of a new municipal bond issue? I. All new municipal bonds have a legal opinion II. Only new issue municipal revenue bonds have a legal opinion III. Municipal issuers desire a qualified opinion IV. Municipal issuers desire an unqualified opinion
All new municipal bonds have a legal opinion Municipal issuers desire an unqualified opinion All new municipal issues have a legal opinion printed on the bond. The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he examines municipal statutes, state laws, judicial edicts, and tax regulations. An unqualified opinion is required, meaning the bond counsel is satisfied that the issue is valid, legal, binding and federally tax exempt. If the bond counsel has any problems with the issue, then the opinion would be qualified by the bond counsel. New municipal issues with qualified legal opinions are virtually unmarketable.
A municipality has issued a general obligation bond. Which of the following are sources of income available for debt service? I. Collected current ad valorem taxes II. Collected back due ad valorem taxes III. Fines IV. Assessments
All of them
A municipality has issued a general obligation bond. Which of the following are sources of income available for debt service? I. ad valorem taxes II. license fees III. fines IV. assessments
All of them
Which of the following statements are TRUE regarding a municipal bond issue that is advance refunded? I. The security that backs the advance refunded bonds will change after the issue is refinanced II. the bondholder's lien on pledged revenues will be defeased in accordance with the terms of the bonds contract III. the marketability of the advance refunded bonds will increase IV. the funds to pay the debt service requirements on the advance refunded bonds are set aside in escrow
All of them
Which of the following would be used to evaluate a general obligation bond issue? I. the trend of assessed property valuation II. The collection ration of the issuer III. the debt ratios of the issuer IV. the mill rate trend of the issuer
All of them
The bond counsel will review which of the following to ascertain if a municipal issuer has the authority to sell bonds? I. State constitution II. Validity of the signatures of the issuer's representatives III. Enabling legislation IV. Local statutes and judicial opinions
All of them The bond counsel will review all of the choices given to ascertain if a municipal issuer has the authority to sell bonds - the State constitution which gives those powers; any enabling legislation which affects the issuance of new bonds; any court opinions that are relevant; and the counsel will ascertain that the issuer's representatives are authorized to sell the bonds.
Which of the following information would be found in a municipal bond resolution? I. Any restrictive covenants to which the issuer must adhere II. Any call provisions providing for redemption prior to maturity as specified in the contract III. The credit rating assigned to the issue by a nationally recognized ratings agency IV. The compensation received by the underwriters for selling the issue to the public
Any restrictive covenants to which the issuer must adhere Any call provisions providing for redemption prior to maturity as specified in the contract The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions. The credit rating is given by the ratings agencies (e.g., Moody's or Standard and Poor's); and is found in their publications. The underwriter's compensation is disclosed to investors in new negotiated municipal bond offerings in the Official Statement (the disclosure document, similar to a prospectus, for new municipal issues).
Which of the following municipal issues is a short term note that is retired by a later permanent bond sale? A. BAN B. RAN C. TAN D. TRAN
BAN Municipalities issue BANs (Bond Anticipation Notes) to "pull forward" funds that will be collected from a later permanent bond sale. 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.
New issues of short term municipal notes and bonds are available in which forms? I. Bearer II. Book Entry III. Registered to Principal and Interest
Book Entry New issues of municipal notes are available only in "book entry" form. The same is true for new issues of municipal bonds.
When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)? A. Both interest and principal payments are made semi-annually B. Interest is paid semi-annually and principal is paid at maturity C. Principal is paid semi-annually and interest is paid at maturity D. Both interest and principal are paid at maturity
Both interest and principal are paid at maturity A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal" amount) and the accreted interest income.
Which statements are TRUE about a Certificate of Participation (COP)? I. COPs are considered to be a general obligation of the issuer II. COPs are considered to be backed by a revenue pledge III. Payments to security holders are contingent on the governing body making an annual appropriation from budgeted funds IV. Payments to security holders are not contingent on the governing body making an annual appropriation from budgeted funds
COPs are considered to be backed by a revenue pledge Payments to security holders are contingent on the governing body making an annual appropriation from budgeted funds A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed).
The income source backing a special tax bond issue could be: I. Cigarette taxes II. Sales taxes III. Ad valorem taxes IV. Business taxes
Cigarette taxes Sales taxes Business taxes Ad valorem taxes do not back special tax bond issues. Ad valorem taxes back general obligation bonds. The definition of a special tax bond is one which is not backed by ad valorem taxes, but rather by another tax source (such as excise, sales, business or income taxes).
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
Decreasing interest payment amounts Increasing principal repayment amounts 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.
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
Depreciation and amortization 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.
Which municipal bond is MOST likely to have a mandatory sinking fund provision in the Trust Indenture a. Tax Anticipation Notes b. Water District Bonds c. Dormitory Revenue Bonds d. School District Bonds
Dormitory Revenue Bonds
Which of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds? I. Expected demand for the facility II. Effect of competing facilities III. Expected operating costs of the facility IV. Bond trust indenture
Expected demand for the facility Effect of competing facilities Expected operating costs of the facility
If a municipality is expecting to receive federal funding for mass-transit programs, it could borrow against the expected funds to be received by issuing: A. BANs B. TANs C. GANs D. CLNs
GANs GAN stands for "Grant Anticipation Note." A GAN can be issued by a municipality to "pull forward" and get immediate use of federal grant monies that are expected to be received in the upcoming months. These federal grant monies are used for mass transit, energy conservation and pollution control improvements.
A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell: I. General obligation bonds II. Revenue bonds III. Industrial revenue bonds
General Obligation Bonds Voter approval is needed for a municipality to sell general obligation bonds (non-self supporting debt) in an amount that exceeds the municipality's constitutional limit. Revenue bonds and industrial revenue bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections.
A bond counsel would render a qualified legal opinion in which of the following circumstances? I. Liens on certain real properties prevent the issuer from obtaining clear title to those assets II. Pending litigation against the issuer may affect future revenues from the project III. Underwriters for the issue have not complied with MSRB disclosure requirements in connection with the sale of the issue
Liens on certain real properties prevent the issuer from obtaining clear title to those assets Pending litigation against the issuer may affect future revenues from the project
A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell: I. Limited tax general obligation bonds II. Unlimited tax general obligation bonds III. Self-supporting revenue bonds IV. Self-supporting industrial revenue bonds
Limited tax general obligation bonds Unlimited tax general obligation bonds Voter approval is needed for a municipality to sell general obligation bonds (non-self supporting debt) in an amount that exceeds the municipality's constitutional limit. It makes no difference if the general obligation bonds are backed by limited or unlimited taxing power. Revenue bonds and industrial revenue bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections.
Which of the following insure municipal bonds? I. MBIA II. AMBAC III. SIPC IV. FDIC
MBIA AMBAC
Under a municipal revenue bond rate covenant, rates must be set to cover all of the following EXCEPT: A. operation of the facility B. debt service C. maintenance of the facility D. optional sinking fund deposits
Optional Sinking Fund Deposits Revenue bond rate covenants usually require that rates be set at a level sufficient to cover operation and maintenance of the facility, as well as debt service costs. There is no requirement to cover "optional" sinking fund deposits or reserve fund deposits.
Which of the following actions must be taken if a municipality wishes to raise its debt limit? A. Public referendum B. Court order C. Judicial edict D. Tax assessment
Public referendum If a municipality wishes to raise its debt limit, the voters must approve via a public referendum. In effect, the voters are approving an increase in their taxes when they approve such a measure.
A municipal note that is issued in anticipation of receiving future revenues is a: A. TAN B. RAN C. TRAN D. BAN
RAN A Revenue Anticipation Note (RAN) is issued by a municipality that wishes to borrow short-term against revenues that are expected to be received in the near future. An example would be the City of New York borrowing, via a RAN issue, against a mass transit subsidy payment from the Federal government to be received in the near future.
In order to render an opinion on a new municipal bond issue, the bond counsel will examine all of the following EXCEPT: A. Municipal statutes B. State constitution and amendments C. Tax code and interpretive regulations D. Securities Act of 1933
Securities Act of 1933 The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he examines municipal statutes, state laws, judicial edicts, and tax regulations. Municipal securities, as well as Government and Agency securities, are exempt from the provisions of the Securities Acts (with the exception of these Acts' broadly written anti-fraud provisions). Thus, these would not be examined by the bond counsel in connection with rendering a legal opinion.
Which of the following is a promise by the issuer to keep the revenues collected from running the facility separate from other municipal accounts? A. Defeasance covenant B. Catastrophe call covenant C. Segregation of funds covenant D. Sinking fund covenant
Segregation of funds covenant
A political subdivision wishes to issue a bond backed by taxes on cigarettes and gasoline. It would most likely issue a(n): A. Special tax bond B. Industrial revenue bond C. Special assessment bond D. General obligation bond
Special tax bond A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond. These "special taxes" are typically excise taxes on tobacco, alcohol and gasoline.
To smooth out tax collections, a municipality will issue a? A. BAN B. TAN C. RAN D. TRAN
TAN Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue.
During its fiscal year, New York state is experiencing a temporary cash flow shortage, expected to last for 5 months. To meet current obligations, the state would most likely issue: A. General Obligation bonds B. TANs C. CLNs D. Moral Obligation bonds
TANs To ease a temporary cash flow shortage, municipalities will issue either TANs (Tax Anticipation Notes) or RANs (Revenue Anticipation Notes). These notes are paid off when the taxes or anticipated revenues are collected sometime in the near future. Long term bond issues are not appropriate to meet cash flow shortages and CLNs (Construction Loan Notes) are only issued in connection with building projects.
To ease temporary cash flow shortages, municipalities will issue which of the following? I. General obligation bonds II. Tax anticipation notes III. Revenue anticipation notes IV. Moral obligation bonds
Tax anticipation notes Revenue anticipation notes To ease a temporary cash flow shortage, municipalities will issue either TANs (Tax Anticipation Notes) or RANs (Revenue Anticipation Notes). These notes are paid off when the taxes or anticipated revenues are collected sometime in the near future. Long term bond issues (like General obligation bonds and moral obligation bonds) are not appropriate to meet cash flow shortages.
Which of the following projects would be financed by a revenue bond issue? I. The construction of a new subway line II. The construction of a new junior high school III. The construction of a new hydroelectric generating plant IV. The construction of a new sewage treatment plant
The construction of a new subway line The construction of a new hydroelectric generating plant The construction of a new sewage treatment plant Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.
The principal advantage of purchasing a variable rate municipal note is: A. The interest rate can be expected to remain fairly stable B. The market value can be expected to remain fairly stable C. The marketability risk can be expected to be lower D. The credit risk can be expected to be lower
The market value can be expected to remain fairly stable With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes will fluctuate up or down, depending upon market interest rates. Thus, the note always gives a yield that approximates current interest rate levels so the market price of these securities will remain fairly constant. These notes avoid "interest rate risk," also known as market risk, since a rise in interest rates will not devalue these securities. However, they still may have marketability risk (the risk that the securities cannot be easily sold); and can have credit risk.
Which of the following are sources of income that can be used for debt service on municipal revenue bonds? I. User Fees II. Special Taxes III. Lease Rentals IV. Capitalized Interest
User Fees Special Taxes Lease Rentals A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.
Which of the following securities pays a rate of interest that is adjusted periodically to reflect the current interest rates for Treasury securities? A. Adjustment bonds B. Variable rate notes C. Treasury Receipts D. Treasury Rate Notes
Variable rate notes Variable rate notes, also known as reset notes, have a rate of interest that is reset periodically, usually weekly, based upon a recognized interest rate index that usually consists of Treasury Issues. Treasury Receipts are Government bonds that have been "stripped" of coupons. Adjustment bonds are corporate bonds that are issued in reorganizations with interest payable only if the corporation hits a specified earnings target. Finally, there is no such thing as Treasury Rate Notes.
Special assessment bond issues are used to fund a public improvement that will: I. accrue to the public at large II. accrue to segment of the public III. be paid from taxes which have no relationship to the value of the benefit received IV. be paid from taxes which have a relationship to the value of the benefit received
accrue to segment of the public be paid from taxes which have a relationship to the value of the benefit received A special assessment bond is one which is used to fund an improvement that benefits only a segment of the population; and only those people are charged taxes to pay for that improvement. Such taxes cannot exceed the value of the benefit received. This makes them totally different from general tax collections which have no such "tie-in".
Types of funds used to back revenue bond issues include all of the following EXCEPT: a. excise taxes b. lease rentals c. ad valorem taxes d. enterprise activity income
ad valorem taxes
Types of funds used to back revenue bond issues include all of the following EXCEPT: A. excise taxes B. lease rentals C. ad valorem taxes D. enterprise activity income
ad valorem taxes Ad valorem taxes back general obligation bonds. Revenue bonds can be backed by any source of revenue other than ad valorem taxes. These sources include revenue from facility operations, grants, excise taxes, or other non-ad valorem taxes, like sales and income taxes.
A bond counsel would render a qualified legal opinion in which of the following circumstances? I. after examining the city property records, it appears that clear title cannot be given to land on which a proposed facility is to be built II. the issue has not been registered with the SEC and is being offered without a prospective III. the feasibility study projects revenues for a new dormitory without taking into account the impact of competing facilities nearing completion IV. the interest on the bonds may be taxable based on preliminary IRS regulations
after examining the city property records, it appears that clear title cannot be given to land on which a proposed facility is to be built the interest on the bonds may be taxable based on preliminary IRS regulations
A municipal revenue bond trust indenture includes an "additional bonds test" covenant. This means that: a. an earnings test must be satisfied before additional bonds can be issued against the same revenue source b. additional bonds can only be issued of they have a subordinated lien on pledged revenues c. additional bonds can only be issued after the original issue is called or advance refunded d. additional bond issues having a lien on the same revenue source are prohibited
an earnings test must be satisfied before additional bonds can be issued against the same revenue source
All of the following would be found in a municipal bond resolution EXCEPT: A. the issuer's duties to the bondholders B. the nature of the obligation C. any restrictive covenants to which the issuer must adhere D. any costs to be paid by the issuer in connection with issuing the bonds
any costs to be paid by the issuer in connection with issuing the bonds The bond resolution (or bond contract) is the contract between the issuer and the bondholder. It spells out the nature of the obligation; the issuer's duties to the bondholders; and any restrictive covenants to which the issuer must adhere. Any costs that the issuer incurs to sell the bonds has no bearing on the bond contract, since the bondholder is not involved in these expenses - they are solely the responsibility of the issuer.
Which of the following statements are TRUE regarding callable municipal issues? I. bonds are usually called when interest rates have declined II. callable bond yields are higher than non-callable bond yields III. as interest rates fall, callable bonds trading at a premium will rise in value at a greater rate than non-callable issues IV. call premiums usually fully compensate the bondholder for any lost income arising from the bonds being called
bonds are usually called when interest rates have declined callable bond yields are higher than non-callable bond yields
Municipal bonds are offered out "firm" by one dealer to another. All of the following are true regarding this EXCEPT the: a. buying dealer has control over the bonds for a specified time period b. buying dealer is able to renegotiated the price c. buying dealer can sell the bonds before actually purchasing them d. selling dealer will not change the price for a specified time period
buying dealer is able to renegotiated the price
A facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated? a. defeasance covenant b. catastrophe call covenant c. maintenance covenant d. sinking fund covenant
catastrophe call covenant
A. facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated? A. defeasance covenant B. catastrophe call covenant C. maintenance covenant D. sinking fund covenant
catastrophe call covenant If a facility is condemned, it can no longer generate revenues. Though the question is not clear as to why it was condemned, the best choice is that a catastrophe call provision would be activated. This requires the issuer to call in the bonds, repaying the bondholders if a disaster occurs. Of the other choices, sinking fund covenants and defeasance covenants have no bearing. A maintenance covenant requires the issuer to maintain the facility in good repair. This covenant is not "activated" by a condemnation, as is a catastrophe call covenant.
The final responsibility for the debt service on industrial revenue bonds rests with the: a. issuing municipality b. corporate lessee of the facility c. bond trustee d. bond underwriter
corporate lessee of the facility
All of the following are necessary to calculate the total purchase price for a municipal bond traded on a yield basis in the secondary market EXCEPT: a. coupon rate b. yield to maturity c. dated date d. trade date
dated date
Under a net revenue pledge, once operation and maintenance costs are paid, what is the next item that is paid? A. debt service reserve fund B. reserve maintenance fund C. debt service expense D. renewal replacement
debt service expense Net revenues are defined as gross revenues less operation and maintenance costs. Once operation and maintenance are covered, the net revenues that remain are first used to pay debt service.
Level debt service is best described as: A. debt service remains the same amount each year B. debt service decreases as the years progress C. principal repayments decrease as the years progress D. principal repayments stay the same as the years progress
debt service remains the same amount each year 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. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases; and the interest amount decreases. The total of the two remains the same. This is essentially the same idea as a mortgage amortization schedule.
The amount by which the par value of a municipal bond exceeds the purchase price of the bond is termed the: a. spread b. discount c. premium d. takedown
discount
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
found in revenue bond issues not found in general obligation bond issues 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.
A double barreled revenue bond is one which offers investors: a. double the normal interest rate due to the high risk factor b. both a high rate of interest and a high level of creditworthiness c. the choice of both term and serial maturities d. general obligation backing in addition to a revenue pledge
general obligation backing in addition to a revenue pledge
The type of municipal bond issue that would be used to finance the construction of public schools would be a: A. revenue bond B. special tax bond C. moral obligation bond D. general obligation bond
general obligation bond Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. Special tax bonds pledge collected "special taxes," such as excise taxes, to pay for the financing of a project. For example, a road improvement district bond issue could be financed by a special gasoline tax. A moral obligation bond is only issued in times of municipal distress, when the municipality does not have enough taxing power or revenue generating ability to sell a normal bond issue. To bail out the local municipal issuer, the state can morally obligate itself to pay if the municipal issuer cannot.
Constitutional debt limits are imposed on the issuance of: A. revenue bonds B. moral obligation bonds C. general obligation bonds D. industrial development bonds
general obligation bonds Municipalities impose debt ceilings on the dollar amount of bonds that can be issued backed by ad valorem taxing power (G.O. bonds). To raise this limit requires a public referendum. Debt limits do not apply to self supporting debt such as revenue bonds or industrial revenue bonds. They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).
An "unqualified" legal opinion is one which: A. gives a conditional affirmation of the legality of the securities B. gives an unconditional affirmation of the legality of the securities C. is given by an unqualified bond counsel D. disqualifies the issue from legal issuance
gives an unconditional affirmation of the legality of the securities An unqualified legal opinion is a "clean" opinion, where the bond counsel has found no legal problems. Thus, the opinion is an unconditional affirmation of the legality of the issue.
A pledge that all revenues received will be used for debt service prior to deductions for any costs or expenses is a: A. net revenue pledge B. gross revenue pledge C. rate covenant D. debt service pledge
gross revenue pledge A gross lien revenue bond is one where the bondholders have claim to the revenues received before any other cash expenses are paid.
Municipal variable rate demand notes: I. have a market value which will never go below par II. have a market value which will never go above par III. have a yield which will never fall below the stated rate IV. have a yield which will never rise above the stated rate
have a market value which will never go below par have a yield which will never rise above the stated rate Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk and the yield cannot go above the stated rate. However, if interest rates fall, the price can go above par (by a small amount) and the yield can fall below the stated rate until the next reset date.
An investor is seeking a municipal bond issue offering call protection. An issue having which features would not be an appropriate investment? I. low stated interest rate II. high stated interest rate III. low stated call premiums IV. high stated call premiums
high stated interest rate low stated call premiums
All of the following are sources of income available for general obligation bond debt service EXCEPT: A. ad valorem taxes B. highway tolls C. license fees D. assessments
highway tolls General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Ad valorem taxes, fines collected for paying taxes late, assessments of additional taxes, as well as fees collected that are not a specified income source for revenue bonds, are all sources of income backing G.O. issues. Highway tolls are pledged to pay the debt service on revenue bonds that are sold to finance the construction of the road. These monies are not available to pay the debt service on G.O. bond issues.
Which of the following municipal securities would be considered a "double barreled" issue? a. revenue bond backed by two sources of revenue b. hospital revenue bond backed by ad valorem taxing power c. moral obligation bond d. bond anticipation note
hospital revenue bond backed by ad valorem taxing power
The ratio of pledged revenues to debt service requirements would be used to analyze which of the following municipal issues? a. School district bonds b. hospital revenues bonds c. special tax bonds d. general obligation bonds
hospital revenues bonds
The feasibility study prepared in connection with a new municipal revenue bond offering is performed by the: A. issuer B. underwriter C. bond counsel D. independent consultant
independent consultant The feasibility study in a revenue bond offering is a projection of building costs; expected revenues; and expenses. The net result should show that the revenues anticipated from the project are sufficient to pay for both operation and maintenance of the facility and interest expense on the bonds issued to finance the construction, as well as cover the repayment of the bonds. This study is performed by an independent consulting firm.
A debt obligation issued by a municipality for the benefit of a corporate user is a(n): A. overlapping debt B. double barreled debt C. industrial development debt D. moral obligation debt
industrial development debt Industrial development bonds are issued by municipalities to build facilities that are leased to corporate users. These are a type of revenue bond where the lease payments made by the corporate lessee are the source of funds to pay debt service on the issue.
Significant investment features for the purchaser of municipal bonds include all of the following EXCEPT: a. interest is currently federal tax exempt b. maturities and issues may be diversified c. interest is currently state and local tax exempt d. insured issues are available for customers wishing minimum credit risk
interest is currently state and local tax exempt
A municipal issuer would call an issue for all of the following reasons EXCEPTS: a. substantial funds have accumulated in the issuer's surplus account b. interest rates have risen sharply since the issuance of the bonds c. the facility built with the proceeds of the issue has been destroyed in a flood d. the proceeds of the issue were never expended due to legal obstacles
interest rates have risen sharply since the issuance of the bonds
The Bond Resolution is the contract between the: A. issuer and bondholder B. bond counsel and issuer C. bond counsel and bondholder D. issuer and Municipal Securities Rulemaking Board
issuer and bondholder
Which of the following would NOT be considered when evaluating the credit risk of a municipal revenue bond? a. coverage ratios b. legislative actions c. competing facilities d. management experience
legislative actions
If an issuer defaults on a moral obligation bond, payment can only be made by: a. legislative apportionment b. judicial edict c. legal authorization d. municipal injunction
legislative apportionment
If an issuer defaults on a moral obligation bond, payment can only be made by: A. legislative apportionment B. judicial edict C. legal authorization D. municipal injunction
legislative apportionment Moral obligation bonds are backed by pledged revenues and also by a non-binding pledge to report any revenue deficiencies to the state legislature. The legislature is authorized to apportion the funds necessary to service the debt, but is under no obligation to do so.
A workable quotation given by a municipal dealer represents a(n): a. firm bid b. likely bid c. approximate market value, with no bid or offer d. bid or offer for 100 bonds
likely bid
Mandatory redemption provisions of a municipal bond contract may be met by: I. making periodic deposits to a segregated account (sinking fund) II. advance refunding the issue III. making a tender offer for outstanding bonds
making periodic deposits to a segregated account (sinking fund)
The municipal bond counsel opines on all of the following EXCEPT: A. validity B. legality C. marketability D. constitutionality
marketability The bond counsel examines new municipal issues for legal or tax problems and renders an opinion on the validity, legality and tax exempt status of the issue. Bond counsels do not render market or economic opinions, which is the same as rendering an opinion on the marketability of an issue.
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
monies received from a permanent take-out financing 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).
Below is a listing of municipal bonds with the same credit ratings and maturities. Arrange the bonds in order of highest yield to lowest yield: I. general obligation bond II. public purpose revenue bond III. non-essential use private purpose revenue bonds
non-essential use private purpose revenue bonds public purpose revenue bond general obligation bond
Under a municipal revenue bond rate covenant, charges for the use of a facility must be set at a level sufficient to cover: I. operation and maintenance of the facility II. debt service and mandatory deposits to the debt service reserve funds III. optional sinking fund deposits IV. deposits to the reserve maintenance fund
operation and maintenance of the facility debt service and mandatory deposits to the debt service reserve funds
The proceeds of a "Build America Bond" may be used for all of the following EXCEPT: A. public buildings B. transportation infrastructure C. water and sewer projects D. prerefunding outstanding issues
prerefunding outstanding issues 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 debt market for needed capital projects. The proceeds of BABs cannot be used to prerefund existing issues (that does not create jobs).
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
refund an outstanding bond issue 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.
All of the following are true statements regarding revenue bonds EXCEPT: a. issuance of the bonds is dependent on earnings requirements b. the bonds may be double barreled with backing by ad valorem taxes c. revenue bonds are only suitable for investors willing to assume a high level of risk d. yields for revenue bond issues are generally higher than yields for comparable G.O. issues
revenue bonds are only suitable for investors willing to assume a high level of risk
Regarding the flow of funds set forth in a municipal bond contract, collected monies would FIRST be deposited to the: a. operations and maintenance fund b. debt service reserve fund c. revenue fund d. reserve maintenance fund
revenue fund
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
revenue fund 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.
A municipal dealer offers bonds to another dealer "firm for one-half hour with a five minute recall." This means that the: I. selling dealer cannot change the price for one-half hour II. selling dealer cannot change the price for the next five minutes III. selling dealer has the right to contact the other dealer during the half hour to change the quote if a transaction does not take place in the next five minutes IV. buying dealer must call back the selling dealer in five minutes if it wishes to purchase the bonds
selling dealer cannot change the price for one-half hour selling dealer has the right to contact the other dealer during the half hour to change the quote if a transaction does not take place in the next five minutes
An "unqualified" legal opinion on a revenue bond is one which: A. states that the pledged revenues are subject to prior liens B. is given by an unqualified bond counsel C. states that no liens have been found against pledged revenues D. states that the bond counsel is qualified in the state to render an opinion
states that no liens have been found against pledged revenues An unqualified legal opinion is a "clean" opinion, where the bond counsel has found no legal problems. For a revenue bond issue, an unqualified opinion means that the bond counsel has not found any legal claim (liens) on the revenues that have been pledged to the bondholders.
A "qualified" legal opinion on a revenue bond is one which: A. states that the pledged revenues are subject to prior liens B. is given by a qualified bond counsel C. states that no liens have been found against pledged revenues D. states that the bond counsel is qualified in the state to render an opinion
states that the pledged revenues are subject to prior liens A qualified legal opinion is one where the bond counsel has found a legal or tax "problem," and the counsel details the "qualification" in the opinion. For a revenue bond issue, a reason for a qualified opinion is that the bond counsel has found other legal claims (liens) on the revenues that have been pledged to the bondholders.
BABs are: I. subject to Federal income tax II. exempt from Federal income tax III. issued in the taxable bond market IV. issued in the tax-exempt bond market
subject to Federal income tax issued in the taxable bond market "BABs" are Build America Bonds. Build America Bonds 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 debt market for needed capital projects.
BABs are: a. subject to federal income tax b. exempt from federal income tax c. issued in the taxable bond market d. issued in the tax-exempt bond market
subject to federal income tax issued in the taxable bond market
The best measure of a municipality's ability to collect the taxes necessary to service general obligation debt is the ratio of: a. debt per capita b. pledged revenues to debt service c. taxes collected to taxes assessed d. debt to assessed valuation
taxes collected to taxes assessed
The interest received from older "tax free" Industrial Development Bond (IDBs) issues is taxable if the holder of these bonds is: A. a customer B. a broker/dealer C. the corporate lessee D. a bank
the corporate lessee The interest income earned from Industrial Development Bond Issues that were issued prior to 1986 was generally tax exempt. The lease payments made by the corporation are used to fund the interest payments made on the outstanding debt. These lease payments are tax deductible to the corporate lessee. If the corporation were to buy the outstanding bond issue, it would receive interest payments on the bonds that are tax free. Effectively, the corporation has taken a tax deduction for the lease payments; and has converted these payments into tax free interest income. The IRS does not allow this. If the purchaser of the bonds is a "substantial user" of the facility being leased, then the interest income received becomes taxable to the corporate lessee.
A customer in the 28% tax bracket is considering the purchase of a municipal bond yielding 8% or a corporate bond yielding 11%. 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 yield are equivalent d. the coupon rates for each bond are necessary to determine the effective yield
the effective yield on the municipal bond is higher 8% / (100% - 28%) = 11.11%
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
the geographic location of the issuers the credit rating of each issue the revenue source backing each issue
A municipal revenue bond trust indenture includes an "additional bonds test" covenant. This means that: A. the issuer is prohibited from issuing new debt under any circumstance B. the issuer is prohibited from issuing new debt unless the facility's revenues are sufficient to pay for existing and additional debt C. the issuer is prohibited from issuing new debt unless outstanding bonds are called D. additional debt can be issued without restriction
the issuer is prohibited from issuing new debt unless the facility's revenues are sufficient to pay for existing and additional debt An "additional bonds test" means that the issuer is prohibited from issuing new bonds against the revenues of a facility, unless the facility's revenues are sufficient. Typically, the debt service on the old bonds is added to that of the new bonds. The revenues of the facility must cover, by an adequate margin, the combined debt service before additional bonds can be sold.
A double barreled bond is one backed by a pledged source of revenue, as well as: A. the guarantee of the U.S. Government B. U.S. Government Treasury Bonds held in trust C. the pledge of the municipality's ad valorem taxing power D. the municipality's moral obligation to pay
the pledge of the municipality's ad valorem taxing power A "double barreled" bond is a municipal revenue bond whose principal and interest payments are backed by a revenue pledge; however, if the revenues are insufficient to cover the debt service requirements, the municipality will use its ad valorem taxing power to meet the deficit.
Short sales of municipal bonds rarely occur because: a. Rule 10b-5 of the Securities Exchange Act of 1934 prohibits the short sale of municipal bonds for most traders b. round lot trades ($100,000 face value) are too expensive to carry c. the trading market is thin, making short covering difficult d. only municipal broker's brokers are allowed to take short positions
the trading market is thin, making short covering difficult
Which of the following are TRUE statements regarding the tax equivalent yield of a municipal bond? I. the tax equivalent yield is disclosed on the customer confirmation II. the yield will vary depending on the tax bracket of the customer III. the tax equivalent yield will change as the market price of the bond varies IV. the tax equivalent yield is the complement of the current yield
the yield will vary depending on the tax bracket of the customer the tax equivalent yield will change as the market price of the bond varies
The flow of funds stated in the trust indenture has payments being made to a sinking fund after the operations and maintenance fund is paid. The sinking fund is when monies: a. to meet debt service requirements are deposited b. to pay extraordinary maintenance or replacement costs are deposited c. to pay for regularly scheduled repairs and replacements are deposited d. "left-over" after all other uses are exhausted are deposited
to meet debt service requirements are deposited
The flow of funds stated in the trust indenture has payments being made to a sinking fund after the operations and maintenance fund is paid. The sinking fund is where monies: A. to meet debt service requirements are deposited B. to pay extraordinary maintenance or replacement costs are deposited C. to pay for regularly scheduled repairs and replacements are deposited D. "left-over" after all other uses are exhausted are deposited
to meet debt service requirements are deposited The sinking fund is where monies to meet debt service requirements are deposited. Choice B is the Reserve Maintenance Fund; Choice C is the Renewal and Replacement Fund; and Choice D is the Surplus Fund.
Municipal bond traders execute transactions: I. on the floor of recognized exchanges II. with bank dealers in the over-the-counter market III. with brokerage wire houses in the over-the-counter market IV. with municipal broker's brokers
with bank dealers in the over-the-counter market with brokerage wire houses in the over-the-counter market with municipal broker's brokers
