Progress Exam 4

D (A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. Only the syndicate manager is entitled to the management fee. A broker-dealer that is not a member of the syndicate selling part of a new issue of municipal bonds is entitled to the concession.)

A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is a member of the syndicate, the firm is entitled to the: A. Takedown less the concession B. Additional takedown plus the management fee C. Total takedown less the management fee D. Total takedown

B (The interest earned on corporate bonds is fully taxable at the investor's tax bracket. The investor's yield from a 10% corporate bond purchased at par is 10%. Since the investor must pay taxes at a rate of 28%, the investor may keep 72% of all earnings (100% - 28%). Therefore, the investor's net yield from a corporate bond yielding 10% is 7.2% (10% x 72% = 7.2%).)

A customer in the 28% tax bracket buys a 10% corporate bond at par. What is the investor's net yield? A. 2.8% B. 7.2% C. 10% D. 13.9%

D (According to MSRB rules, providing access to the official statement online through EMMA—the MSRB's Electronic Municipal Market Access system—satisfies the delivery rules. However, if the customer would like a printed copy, the broker-dealer must provide one upon request.)

A customer of a broker-dealer has purchased a new municipal bond at the public offering price and has received instructions on how to access the official statement from EMMA. The customer would prefer a printed copy. According to MSRB rules, the broker-dealer: A. Is considered to have satisfied the requirement to deliver an official statement B. Will instruct the customer to print the official statement C. Will instruct the customer to contact the municipality offering the security D. Must deliver a copy to the customer upon request

C (If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The investor may pay the tax each year or elect to report the entire gain at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability. The IRS requires that the discount be accreted each year and be used to increase the cost basis of the bond. However, the amount of the accretion is considered interest and is, therefore, exempt from federal tax.)

A customer purchases a municipal bond at $960 in the secondary market that will mature in four years. Which of the following statements regarding the purchase is NOT TRUE? A. The interest is exempt from federal income tax B. The customer will have taxable income if the bond is held to maturity C. The customer will need to pay a tax on the prorated amount of the discount each year D. If the bond was a new issue when purchased, and held to maturity, the customer will not have to pay any federal tax

D

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

B (A grant anticipation note (GAN) is normally paid from funding provided by the federal government. A bond anticipation note (BAN) is paid from proceeds from the issuance of long-term bonds. A revenue anticipation note (RAN) is paid from revenues to be received at a future date. A tax anticipation note (TAN) is normally paid from future tax receipts, such as property (ad valorem) taxes.)

A grant anticipation note is normally paid from: A. Proceeds from the issuance of long-term bonds B. Funds received from the federal government C. Revenues received at a future date D.Receipts of future property taxes

D (MSRB rules require that a customer confirmation contains the par value and complete description of the bonds including coupon, maturity, and pertinent call features. The principal amount, accrued interest, and total amount must also be included. The firm must disclose whether it acted as a principal or agent and, if acting as an agent, the firm must disclose the amount of the commission. Although some firms include the rating of the bond, it is not required.)

A municipal bond confirmation sent to a customer need not include: A. The capacity in which the broker-dealer acted B. The par value of the bonds C. A description of the bond D. The bond rating

B (The investor purchased an already outstanding municipal bond at a discount and later redeemed it for par at maturity. The profit on the transaction is taxed as ordinary income. This is different from an example in which the investor purchased an original issue discount municipal bond and held it to maturity. In such an example, the profit is considered interest and is exempt from federal income tax.)

A municipal bond that is issued at par is later purchased at a discount and redeemed for par at maturity. The investor's profit on the transaction is taxed as: A. Capital gains B. Ordinary income C. Tax-deferred interest D. Tax-deferred capital gains

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

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

D (If a municipality issues an original issue discount bond and the investor holds the bond until it matures, the discount is treated as part of the interest income and is exempt from federal taxes. If the bond is sold prior to maturity, then an adjusted cost basis is determined and compared to sale proceeds to determine if there is a gain or loss on the transaction.)

A municipality issues an original issue discount bond. If an investor buys the bond when it is first issued and holds the bond until it matures, what is the tax treatment on the discount? A. The discount is treated as a long-term capital gain B. The discount is treated as ordinary income C. The discount is treated as interest income and is subject to federal tax D. The discount is treated as part of the interest income and is exempt from federal taxes

C (The issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues.)

A revenue bond is backed by a pledge of net revenues. This indicates that: A. All revenues are pledged to pay debt service on the bonds B. Net revenues are pledged to pay operating and maintenance expenses C. The first use of net revenues is to pay the debt service on the bonds D. The issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bonds

C (A bond purchased at a premium is amortized (reduced) to par value over its life. If the adjustment is in equal amounts, straight-line amortization is being used. If the adjustments are not made at an equal rate, constant-yield amortization is being used. For bonds purchased at a discount, the adjustment is referred to as accretion.)

A revenue bond purchased at a premium, whose cost is reduced in equal amounts each year, is using: A. Straight-line accretion B. Constant-yield accretion C. Straight-line amortization D. Constant-yield amortization

D (The legislature does not have a legal obligation to provide funds but is considered to have a moral obligation. Funds would become available after legislative approval.)

A state agency revenue bond does not have sufficient revenue to meet debt service. A provision of the indenture allows the agency to request funds from the state legislature. The legislature has the option of providing or not providing the additional funds. This is a: A. General obligation bond B. Double-barreled bond C. Special tax bond D. Moral obligation bond

C

According to MSRB rules, a municipal bond dealer will NOT consider which of the following factors when determining a markup? A. Expenses B. Profit C. Coupon rate D. Total dollar amount of the transaction

D

An employee of a municipal securities firm would like to open an account with another municipal securities firm. Which of the following statements does NOT apply to the opening of the account? A. The employer must receive duplicate copies of all transactions made in the account B. The employer must be notified about the opening of the account C. The employer must be notified in writing of the employee's intention to open the account D. The employer must approve each transaction before it is executed

B (An engineering report and a feasibility report are necessary for a revenue bond. The other choices represent general obligation securities.)

An engineering report is used for a: A. General obligation bond B.Hospital revenue bond C. Limited-tax GO D. School bond

A (An increase in personal income taxes would result in more investor demand for municipal bonds. This is because the interest income is exempt from federal income taxes.)

An increase in personal income tax rates would MOST likely result in an increased demand for: A. Municipal securities B. AAA-rated corporate bonds C. Mortgage-backed securities D. Treasury bonds

A (The IRS requires that a premium paid for a municipal bond be amortized (written-off) over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.)

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield to maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: A. 0 B. $25 C. $50 D. $100

A (The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. Since the investor is purchasing an out-of-state bond we use the 35% rate. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 35% tax bracket. The municipal bond has a yield of 4.90%. 4.90% (Municipal Bond Yield) / 65% (100% - 35%) = 7.54% Equivalent Taxable Yield)

An investor has a federal tax rate of 35% and a state tax rate of 6% and is offered a 4.90% out-of-state municipal bond. What yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond? A. 7.54% B. 8.31% C. 11.95% D. 14%

B (If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 35% tax bracket. The municipal bond has a 4.50% coupon rate and, since it is purchased at par, the yield is also 4.50%. 4.50% (Municipal Bond Yield) / 65% (100% - 35%) = 6.92% Equivalent Taxable Yield)

An investor in the 35% tax bracket can buy a 4.50% tax-free municipal bond at par. What yield would the investor need in a taxable corporate bond to receive the same after-tax yield as the municipal bond? A. 2.93% B. 6.92% C. 12.86% D. 14.44%

B (A bond swap is simultaneously selling one bond and purchasing another. Bond swaps may be done to change the coupon, maturity, quality or rating, and for tax purposes. Accrued interest is not a consideration.)

Relating to a municipal bond swap, which of the following would NOT be a consideration? A. The coupon rate B. The amount of accrued interest C. The maturity D. The quality

A (A pension fund does not pay tax on its investments. Therefore, it will not find municipal bonds as attractive an investment as it will other higher-yielding investment instruments.)

Tax-free municipal bonds will be least attractive to a(n): A. Pension fund B. Insurance company C. Individual who has just inherited $1,000,000 D. Officer of a corporation who is in the 28% tax bracket

D (The MSRB has the power to regulate broker-dealers, their personnel, and their communications with the public. It does not, however, have the power to regulate municipal issuers.)

The MSRB does NOT regulate municipal securities: A. Dealers B. Salesmen C. Advertising D. Issuers

C (The debt of other districts that the residents of a particular municipal district may be responsible for is overlapping debt. Direct debt is the amount of debt a specific issuer may incur. Self-supporting debt is the amount that is paid from revenues that were received directly from the project for which the debt was issued.)

The debt of other districts that the residents of a particular municipal district may be responsible for is called: A. Self-supporting debt B. Direct debt C. Overlapping debt D. Unsecured debt

A (Bonds issued by Puerto Rico are exempt from federal, state, and local taxes. The triple-tax exemption of bonds issued by the Commonwealth of Puerto Rico was provided for by a special act of Congress. The triple exemption also applies to obligations of other territories and possessions of the United States such as the Virgin Islands and Guam. Bonds issued by New York, Alaska, and Hawaii have the interest income exempt from federal taxes, but may be subject to state taxes.)

The interest income on which of the following bonds is exempt from federal, state, and local taxes? A. Puerto Rico B. New York C. Alaska D. Hawaii

C (The interest paid by the issuer to holders of special assessment bonds is derived from charges made to the users of the benefitted property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.)

The interest paid on special assessment bonds is derived from: A. Ad valorem taxes B. Toll road revenues C. Charges on the benefitted property D. Excise taxes

C

The manager of a new issue municipal syndicate wants to allocate securities in a different manner than specified in the syndicate agreement. He may do this if he: A. Notifies the SEC B. Amends the syndicate agreement C. Is prepared to justify the change to the syndicate members D. Assumes any losses incurred by the syndicate members

B (In the event an individual has lost the election and is no longer in office, a municipal finance professional may contribute any amount to defray the expenses incurred during the election since the candidate can no longer influence underwriting decisions by the issuer. However, if the individual had won the election and the municipal finance professional had not made any contributions to the re-election campaign, the contribution allowed under MSRB rules to defray campaign expenses incurred during an election would be permitted.)

The mayor of a town, who is no longer in office, is asking for contributions to defray expenses incurred during her re-election campaign. According to MSRB rules, what dollar amount may a municipal finance professional contribute to defray costs? A. Nothing, unless the municipal finance professional can vote for the individual B. Any amount, since the individual has lost the election and is no longer in office C. $250 if the municipal finance professional can vote for the individual D. $500 if the check is written from a joint account

B (The taxing power of an issuer of a limited tax bond is limited to a specified maximum rate. A special tax bond is a type of revenue bond backed by a specific tax source, such as an excise tax on gasoline.)

The taxing power of an issuer of a limited tax bond is limited to a specified: A. Minimum rate B. Maximum rate C. Tax source D. Collateral

D

Under MSRB rules, all of the following statements are TRUE regarding customer confirmations, EXCEPT for the statement that the confirmation: A. Must show commissions in an agency transaction B. Need not show the markup in a principal transaction C. Must disclose the third party to the trade in an agency transaction or offer to furnish such information upon request D. Need not disclose if the broker-dealer acted as a principal or agent in the transaction

D (All of the choices given regarding customer confirmations are true under MSRB rules except that they need not disclose if the dealer is acting as a principal or agent in the transaction. This is not true since the broker-dealer must disclose the capacity in which it acted. In addition, the dealer is required to disclose the commission on agency transactions and the third party if there is a third party to the transaction. However, the markup charged on a principal transaction does not need to be disclosed.)

Under MSRB rules, which of the following statements is NOT TRUE regarding customer confirmations? A. They must show commissions in an agency transaction B. They need not show the markup in a principal transaction C. They must disclose the third party to the trade in an agency transaction or offer to furnish such information upon request D. They need not disclose if the broker-dealer acted as a principal or agent in the transaction

B (A special tax bond is a type of revenue bond and is usually financed by a tax on certain items such as cigarettes, liquor, or gasoline (excise taxes).)

What type of bond would MOST likely be secured by an excise tax, cigarette tax, or gasoline tax? A. GO bond B. Special tax bond C. Double-barreled bond D. Special assessment bond

A

When a municipal bond is issued as an original issue discount, the upward adjustment in the purchase price is called: A. Accretion B. Amortization C. Depreciation D. Depletion

A (The term coverage (short for coverage ratio) is used when discussing revenue bonds. It is an indication of the number of times by which the earnings generated over a certain period will exceed the debt service requirement. The debt service is the required payments for interest and retirement of principal. The coverage is computed by comparing the ratio of net revenue (gross revenue minus operating and maintenance expense) to debt service.)

When computing coverage for revenue bonds, the ratio used is: A. Net revenue to debt service B. Gross revenue to operating expenses C. Gross revenue to annual interest payments D. Net revenue to operating expenses

C (If a security is sold at a loss, and within 30 days (prior to and after the sale), substantially the same security is purchased, the IRS, considers it a wash sale and will disallow the loss. To avoid purchasing a security that the IRS will consider substantially the same as the security sold, you should purchase bonds either by a different issuer or with a different coupon or maturity. The rating of the bonds would not be a factor.)

When doing a municipal bond swap, which of the following items is NOT a factor when trying to avoid the wash sale rule? A. The issuer B. Maturity date C. The rating D. The coupon

D

Which of the following factors is not taken into consideration when determining the markup on a municipal securities transaction? A. The dollar amount of the trade B. The best judgement of the dealer C. The fact that the dealer is entitled to make a profit D. The financial condition of the customer

A (Current interest rates are factors that will affect all bond issuers and would be least useful when analyzing the credit risk of a specific issuer of general obligation bonds.)

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of general obligation bonds? A. The London Interbank Offered Rate (LIBOR) B. The tax base of the issuer C. The amount of unfunded pension liabilities D .The schedule of debt service requirements

D (The credit analysis of a general obligation bond is based on the issuer's ability to levy and collect taxes sufficient to cover the debt service of the issue. The main considerations are as follows. Demographics, such as the diversification of economic activity Factors affecting the issuer's ability to pay, such as the budgetary pictures and legislative climate Any pending litigation against the issuer The credit analysis of a revenue bond is based on the project's ability to generate enough revenue to pay the debt service of the issuer. One consideration is whether there are existing or potential competitive facilities, e.g., if a new airport is being financed by an issuer, is there another airport in the same geographical area?)

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of general obligation bonds? A. The diversification of economic activity B. The budgetary pictures and legislative climate C. Any pending litigation against the issuer D. Existing or potential competitive facilities

A (All of the items listed would be indications of a deteriorating credit situation except an increase in municipal assessed valuations. This indicates that property values have increased, thereby generating a higher tax base.)

Which of the following increases would NOT indicate a deteriorating credit situation for a municipality? A. An increase in municipal assessed valuations B. An increase in per-capita debt C. An increase in tax delinquencies D. An increase in personal bankruptcies

C (A feasibility study is made by a qualified expert to determine if revenues of a project will be sufficient to pay interest when due. A revenue bond, which is backed by the earning power of a specific project, such as tolls from bridges, tunnels, or turnpikes, requires a feasibility study by qualified experts to determine if the revenue generated will be sufficient to pay the interest on the bonds. A special tax bond is secured by a special tax, such as a gasoline tax, and would not require a feasibility study. A general obligation bond is backed by the full faith, credit, and taxing power of the issuing municipality and would not require a feasibility study. A revenue anticipation note (short-term security) is considered a general obligation security.)

Which of the following municipal bonds requires a feasibility study to determine the issuer's ability to pay interest when due? A. A special tax bond B. A general obligation bond C. A revenue bond D. A revenue anticipation note

D

Which of the following municipal issues is MOST likely be brought to market as a negotiated issue? A. General obligation bond B. Bonds issued by a city C. School district bond D. Industrial development revenue bond

B (Of the choices given, the issues that will most likely be purchased through competitive bidding are general obligation bonds. This is usually the method by which most general obligation bonds are sold. Corporate, revenue, and high-yield bonds are usually sold on a negotiated basis.)

Which of the following new bond issues will MOST likely be purchased through competitive bidding? A. Corporate bonds B. General obligation bonds C. High-yield bonds D. Revenue bonds

C (The MSRB has no enforcement power. The SEC and FINRA enforce municipal regulations for broker-dealers. The Comptroller of the Currency, FRB, and FDIC enforce municipal regulations for dealer banks. The MSRB establishes its rules but has no enforcement powers.)

Which of the following organizations does NOT enforce MSRB rules? A. The Comptroller of the Currency B. FINRA C. The MSRB D. The SEC

C (Ad valorem (property) taxes secure a general obligation bond, not a revenue bond. Special taxes, fees, lease payments, and capitalized interest may be used to pay interest on a revenue bond. Capitalized interest is earned on a portion of the proceeds of a bond offering that is not immediately being used by an issuer.)

Which of the following sources of revenue would NOT be available to pay interest on a revenue bond issue? A. Special taxes B. Lease payments C. Ad valorem taxes D. Capitalized interest

C (Under MSRB rules, a financial advisory relationship exists when a municipal securities broker or dealer gives, or enters into an agreement with an issuer to give, financial advisory or consultant services regarding the issuance of municipal securities. A broker-dealer is permitted to provide advice to an issuer relating to the issuance of municipal securities in the capacity of acting as an underwriter and not as a financial adviser. A financial adviser usually charges an issuer a fee, whereas an underwriter's profit comes from the underwriting spread. A broker-dealer that has a financial advisory relationship is prohibited from acting as an underwriter with respect to the same issuer of municipal securities. The rule applies whether the issue is sold on a negotiated or competitive bid basis. There is no restriction on a broker-dealer acting as an underwriter for the same issuer on both negotiated and competitive offerings.)

Which of the following statements is TRUE under MSRB rules? A. A broker-dealer is not permitted to act as a financial adviser to an issuer of municipal securities B. A broker-dealer is permitted to act as a financial adviser and underwriter for the same issuer if the securities are sold on a negotiated basis C. A broker-dealer is permitted to provide advice to an issuer relating to the issuance of municipal securities in the capacity of acting as an underwriter and not as a financial adviser D. A broker-dealer is not permitted to act as an underwriter for the same issuer on both negotiated and competitive offerings

A

Which of the following statements regarding the opening of a new municipal account is NOT TRUE according to MSRB rules? A. An employee of a municipal securities firm may open a new account with another municipal securities firm without notifying his employer B. An employee of a municipal securities firm may open a new account with another municipal securities firm as long as duplicate confirmations are sent to the individual's employer C. A bond attorney may open a new account without restriction D. An officer of a municipal issuer may open a new account without restriction