Part 3

Revenue Fund

(1) this is the account where all receipts and income are deposited and recorded

Operating and Maintenance Fund

(2) For a revenue bond, what is the generally followed order for the flow of funds when revenue is received by the issuer?

Debt Service (Bond Service) Fund

(3) amount are deposted that will be sufficient to pay semi annual interest and maturing principal

Collateralized Mortgage Obligations

(CMO) Developed to minimize risks of Pass Through Certificates. Mortgage pools are not considered means of passing through payments to certificate holders in the same form as received; takes the principal and interest payments from underlying mortgages and creates various classes of bonds called tranches; popular because investors can choose the yield, maturity structure, and risk exposure

Federal National Mortgage Association

(FNMA) "Fannie Mae" a quasipublic agency converted into a private corporation whose primary function is to buy and sell FHA and VA mortgages in the secondary market; backed by its authority to borrow

Student Loan Marketing Association

(Sallie Mae) Purchases insured student loans from qualified lending institutions. Sells normal debentures backed by these loans. Interest paid semi-annually, quoted in 1/32nds. Implicitly backed by government & rated AAA.

Undivided Account (syndicates)

(eastern) each member is responsiblier for a specicfic percentage, even if meet original percentage

Divided Account (syndicates)

(western) each member is responsible for a specific percentage of the issue

Net Revenue Pledge

- operating and maintenance expenses are first deducted from the gross project revenues before being applied to debt service

Clearing Rate

-After the deadline for submissions of orders, the auction agent assembles all the orders from lowest to highest bid and determines the clearing rate, the lowest bid sufficient to cover all the securities exposed for sale

Taxable Equivalent Yield

= Municipal yeild / (100% - Tax Bracket)

Net Yield

= Taxable yield x (100% - Tax Bracket)

Sell Order

In a case where the holder of a municipal security wants to sell a specific amount in auction without being concerned about the clearing rate, what is this order type called?

Series I Bonds

Indexed for inflation. Available in same denomination as EE bonds, but are sold at face value. Interest reset semiannually depending on inflation rate. Pay for up to 30 years.

Construction Loan Notes

Issued by municipalities to fund the construction of project that will eventually be funded by a bond

Federal Home Loan Mortgage Corporation

Known as Freddie Mac, the corporation was established to purchase primarily conventional mortgage loans in the secondary mortgage market; backed by agencies, not US Gov

Statutory Power

Law passed by state or local government allowing the sale of the security; has power to set debt ceiling (limit on amount of debt an issuer is able to incur)

Federal Home Loan Banks

Lowered mortgage rates for homeowners and allowed farmers to refinance their farm loans and avoid foreclosure

Federal Farm Credit Banks

Make agricultural loans to farmers; short-term discount notes and interest-bearing short and long term maturities; interest is subject to federal tax, but not local

Capital Market

Market for long-term securities, maturity greater than a year. Like Treasury bonds, corporate bonds, stock. It has been shown to be quite efficient, with stock prices quickly reflecting new information in an unbiased manner. Also, investors are not able to consistently earn positive abnormal returns by trading information

Debt Service Reserve Fund

Money is allocated here after annual debt service is ensured

Money Market Fund

Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts; An investment whose objective is to earn interest for shareholders while maintaining a net asset value (NAV) of $1 per share. A money market fund's portfolio is comprised of short-term (less than one year) securities representing high-quality, liquid debt and monetary instruments. Investors can purchase shares of money market funds through mutual funds, brokerage firms and banks.

Tax Anticipation Notes

Notes (Warrents) issued in anticipation of collection of taxes usually retirable only from tax collections and frequently ony from the proceeds of the tax levy whose collection they anticipate.

Unfunded Pension Liabilities

One where adequate reserves have not been set aside to meet this future obligation; will have an adverse affect on the municipalities credit rating

Bid

Price a prospective buyer is ready to pay. Term is used by dealers who MAKE A MARKET (maintain firm BID and OFFER prices) in a given security by standing ready to buy or sell round lots at publicly quoted prices and by the SPECIALIST in a stock, who performs a similar function on an exchange.

Treasury Arbitrage Restrictions

Prohibits state and local government from refinancing debt and placing the proceeds into an escrow fund that invests in Treasuries that yield above a certain rate

Agency Securities

Securities issued by government-sponsored entities and federally related institutions. Agency securities are exempt from SEC registration requirements; low risk with yields higher than US Treasury Securities

STRIPS

Separate Trading of Registered Interest and Principal of Securities; sold at discount; difference between investor's purchase price and the bond's face value is interest

Treasury Bill

Short-term government securities issued at a discount from face value and returning the face amount at maturity; discount securities & non-interst bearing securities; quoted at discounted yield basis (not as percentage of par value) yeild represents the percentage discount from the FV

Prepayment Risk

Similar to Call Risk, risk of prepayment when interest rates fall, requiring investor to reinvest at a lower rate; rate measures the speed at which mortgages in the pool are being paid off, or how quickly prepayments of principal are being received (rises as i falls)

Tax Swap

Some investors hold municipal bonds which have declined in value wish to sell to realize a loss, but do not want to change the nature of their portfolio

Flow of Funds

Statement found in the bond covenants of municipal revenue issues showing the priorities by which municipal revenue will be applied. Typically, the flow of funds in decreasing order of priority is revenue funds, operation and maintenance, bond debt service, ... expansion of the facility, and sinking fund for retirement of debt prior to maturity.

Revenue Bond

Supported only through revenues generated by projects that are funded with the help of the original bond issue (not backed by taxes) need to conduct feasibility study

Treasury Bonds

T-Bills; US government obligations with original maturities of more than 10 years. They are issued in $1000 denominations and pay interest semiannually; fixed income investment

Treasury Note

T-Note; , certificates issued by the US Treasury in exchange for minimum amounts of $1,000 and maturing in 1 to 10 years; interest barring security; fixed income investment;

Treasury Inflation Protected Securities

TIPS; principal adjusts based on Consumer Price Index

Amortization

The liquidation of a financial obligation on an installment basis; also, recovery over a period of cost or value.

Bid Price

The price a dealer is willing to pay for a security/issue

Negotiated Sale

issuer selects the lead underwriter who will sell the issue (revenue bonds)

Cash Management Bills

maturities ranging from a few days to six months to help overcome temporary cash shortages prior to the quarterly receipt of tax payments

Syndicate Manager

member of the selling syndicate responsible for maintenance of syndicate account records and lead underwriter; responsible for selling some of the new issues of bonds; responsibilities include largest underwriting commitment and keep track of sales and how many bonds are available; provides preliminary pricing

Replacement and Renewal Fund

money is deposited for new and repair costs

Bank-Qualified Issues

municipal bonds with a feature attractive to banks: 80% of the interest that a bank pays on deposits that have been used to buy bank-qualified bonds is tax deductible

Federal Agencies

organizations that deal with a specific area of intrest for the federal govt; securities issued are backed by full faith and credit of the US government.

Extension Risk

risk that a rise in interest rates slows down pre-payments and as a result lengthens the pass through average life and makes the investor receive lower coupon when higher are available

Serial Bond Issue

schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid; provides greater flexibility to meet debt requirements

Variable Rate Demand Obligations

short term municipal notes where the issuer resets the interest rate periodically (usually weekly or monthly), based upon some defined measure, such as the 1-month Treasury Bill interest rate. At the reset date, the owner can either continue to hold the note at the new interest rate; or can redeem the note with the issuer at par. Thus, the interest rate on the note varies; and the note is payable upon demand of the holder at each reset date; VRDO's have a put feature that permits the holder to sell the securities back to the issuer or third party

Money Market

these funds generally pay better that a savings account with a bank, but less than a typical stock mutual fund. These funds are considered very low risk; The money market provides very short-term funds & liquid investments to corporations, municipalities and the United States government. Money market securities are debt issues with maturities of one year or less; liquidity, safety, discount pricing

Reserve Maintenance Fund

unexpected maintenance expenses

Construction Fund

used for future construction (last flow of funds)

Debt Statement

used in the analysis of GO debt. It includes the estimated full valuation of taxable property, the estimated assessed value of property, and the assessment percentage., this would include direct debt (debt the municipality owes) net direct debt (all issues minus any self-supporting debt) overlapping debt (debt of a political entity that overlaps with another political entity) total bonded debt (sum of both long and short term debt plus applicable share of overlapping debt)

Competitive Sale

when an issuer invites all interested underwriters to submit bids on the issue- underwriters are in competition; best bid is one that costs the issuer the least amount of interest over thr life of the issue

Competitive Tenders

when large securities firms submit offers to buy Treasuries to the Federal REserve Board; specificy the price and/or yield at which the firm is willing to buy the Treasuries

Original Issue Discount Securities

A bond, issued at a dollar price less than par which qualifies for special treatment under federal tax law. Under that law, the difference between the issue price and par is treated as tax-exempt income rather than a capital gain, if the bonds are held to maturity where the cost basis equals the redemption price(par) and there is no capital gain

Litigation

A lawsuit; can negatively affect the community's ability to pay the debt service on outstanding bonds

Auction Rate Securities

A long-term debt issue, but it acts as if it were a shorter term issue because interest rates are reset approximately every month, depending on whether the issue is tax exempt, and the interest is paid either shortly after the auction yield is settled or every quarter or half year

Constant Yield Method

A method used for tax purposes to accrete the cost of a bond purchased at an original issue discount (straight line accretion)

General Obligation Bonds

A municipal bond backed by the power of the issuing state or local government to levy taxes to pay back the debt

Sinking Fund

A reserve account in which the issuer of a bond periodically retires some part of the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond.

Bond Anticipation Notes

A short-term debt typically issued to fund initial project costs in advance of the issuance of long-term financing

Ad Valorem Tax

A tax based on the assessed value of real property; tax rate is expressed in mills (millage rate) (0.1% of the assessed value)

Series EE Bond

A type of debt issue that is backed by the full faith and credit of the US Government. They are 30 year investments that are issued at a discount and mature at face value. These bonds are noncallable, nontransferable and must be fully registered. The appreciation fo the bond is considered interest income that is subject to federal tax, but exempt from state and local tax. This income can be reported annually as it accrues or can be deferred until the bond is cashed in or reaches final maturity

Hold Order

Amount owners wants to hold regardless of clearing rate. Also called roll order.

Call Option

An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period

Underwriter

An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions; link between issuer and public

Syndicate Letter

An invitation to participate in an underwriting syndicate that details the rules of the syndicate, (1) Sent by Manager (2) Specifies Obligations and Responsibilities of Members (3) Only used in Competitive Deals

Put Option

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time

Gross Revenue Pledge

Bondholders are paid before operation and maintenance

Treasury Securities

Bonds issued by the United States Treasury to investors when the federal government borrows money. (Treasury bills have maturity of one year or less. Treasury notes have maturity of one to ten years. Treasury bonds have maturity of more than 10 years.) 1. Marketable (treasuries (bonds, notes, and bills)) 2. nonnegotiatable (savings bonds, which cannot be sold in the secondary market); not registered with the SEC

Premium Bonds

Bonds selling above par value.

Selling Group Members

Broker dealers who participate in the sale of an issue on a best-efforts basis (assume no risk); paid: shares sold x selling concession

Derivative

CMO's can be derivatives; a financial product that derives its value from movements in another financial product (price of underlying security)

Trust Indenture Covenants

Contract between the borrower (the issuer) and the lender (the trustee, who represents the bondholders' interest); includes issuer responsibilities and the bond holders' rights (protection including rate, maintenance, insurance covenants, and financial reports & audits, issuance of additional bonds, nondiscrimination, and insurance covenants)

Municipal Notes

Debt issued by state and local governments to finance capital expenditures such as construction projects. Municipal notes are appealing to investors because they mature in one year or less, offer fixed income and are often exempt from income tax at the local, state and/or federal levels

Real Estate Valuation

Estimates the value based on how much it would cost to replace the property and make adjustments for depreciation/deterioration; good indication of community's health - analysts

Pass-through Certificates

Fixed-income securities that represent an undivided interest in a pool of federally insured mortgages put together by the Government National Mortgage Association (Ginnie Mae).; each certificate represents an undivided interest in the pool, owners share in cash flow generated by pooled mortgages

GO Bond

General Obligiation (aka Full Faith and Credit Bonds; backed by taxes - need voter approval and debt ceiling limitations

Governemnt National Mortgage Association

Ginnie Mae; part ofthe Department of Housing and Urban Development, therefore a true government agency; purpose is to provide financing for residencial housing;

Debt Service Coverage Ratio

Gross Revenue - (Operating + Maintenance expenses); ratio of debt revenue to debt services

Moody's Investment Grade

Highest Rating - Aaa, High-Grade - Aa1, Aa2, Aa3, Upper-Medium Grade - A1, A2, A3, Medium Grade - Baa1, Baa2, Baa3

Types of Revenue Bonds

Housing Revenue Bond; Dormitory bonds; Health Care Revenue; Utility Revenue; Transportation; Special Tax; Special Assessment (directly benefit from the facilities ex: sidewalks); Moral Obligation (government agrees to provide funds needed); Education; Lease Rental; Certification of Participation (COPs); Industrial Development Revenue (IDR); Pollution Control Revenue (PCR); Private Activity Bonds

Grant Anticipation Notes

expecting grants from the federal government

Strike Price

The price at which a specific derivative contract can be exercised. Strike prices is mostly used to describe stock and index options, in which strike prices are fixed in the contract. For call options, the strike price is where the security can be bought (up to the expiration date), while for put options the strike price is the price at which shares can be sold.

Treasury Yield

The return on investment, expressed as a percentage, on the U.S. government's debt obligations (bonds, notes and bills). Looked at another way, the Treasury yield is the interest rate the U.S. government pays to borrow money for different lengths of time

Debt Service

The yearly amount of interest and principal payable (owed) on a bond issue (to the bondholders)

Wash Sale Rule

What rule prohibits tax payers from claiming a loss on a stock that is sold and subsequently repurchased within 30 days?

Secondary Market Discount

When the bonds are bought at a discount in the secondary market, the discount would generally be treated as Ordinary Income (fully taxable) to the investor in the year that the bonds are sold

Municipal Bond

a bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks and schools; advantage: interest received is typically exempt from federal taxation

Dutch Auction

a method of issuing securities (common stock) where investors place bids indication how many shares they are willing to buy and at what price. the price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares

Series HH Bonds

a nonmarketable, interest-bearing U.S. Government savings bond issued at par and purchased only by trading in Series EE bonds at maturity. Interest is exempt from state and local taxation; as of 2004, no longer offered to the public

Revenue Anticipation Notes

a short-term municipal security issued in anticipation of receiving revenues from sources other than income or property taxes. When received, this revenue will be used to repay the note.

Treasury Receipts

a zero-coupon bond sold against a Treasury security placed in a trust. Not backed by the goverment

Term Issue

all bonds mature at the same times. Quoted as a % of par

Tax and Revenue Anticipation Notes

are a combination of the charactersitics of both TANs and RANs

Mortgage-backed Securities

backed by pools of mortgage loans, which not only provide collateral but also the cash flow to service the debt. Any security where the collateral for the issued security is a pool of mortgages. Point is to increase debts attractiveness to investors, decrease investor required rates of return, increasing avail of funds for home mortgages; agencies: Freddie Mac, Fannie Mae, Ginnie Mae

Triple-Tax-Exempt Issues

bonds issued by a territory of US (puerto Rico, US Virgin, Gwam, American Somoa) are not subject to federal, state, or local taxes

Revenue Bond

bonds issued by governments for specific projects and backed only by whatever revenues the projects generate; characterized by the project the bond is financing or by sources backing the bond

Feasibility Study

determines if the proposed solution is feasible and achievable from a financial, technical, and organizational standpoint; consulting engineer studies the project and presents a report to determine if the project can bring in the needed revenues

Municipal Securities Rulemaking Board

established by the Securities Acts Amendments of 1975; an independent SRO that governs the issue and trade of municipal securities; rules require municipal securities underwriters and dealers to protect investors' interest, be thical in offering advice, and be responsive to complaints and disputes; rules apply to all firms and individuals engaged in the conduct of municipal securities business; does not regulate issuers and has no authority to enforce the rules it makes

Surplus Fund

excess money that is used in emergencies