Series 7 - Municipal Bonds
Brokerage Firm Advertising
- Keep all advertising for minimum of 3 years. - Principal manager must approve all ad materials. - Ensure ad materials are accurate and true.
Factors Effecting the Marketability of GO Bonds
- Quality, higher credit rating the safer the bond. - Maturity, the shorter the more marketable. - Interest/Coupon rate, the higher the more marketable. - Call features, callable less marketable than non-callable. - Block size, the larger the more marketable. - Dollar price, the lower the price the better. - Reputation of the issuer. - Sinking funds backing the bond are better. - Insurance against default also better. - Issuers history of dealing with past debt. - Issuers net overall debt. - Lower debt per capita (debt divided by residents). - Population trend in the municipality (increasing is better).
Revenue Bond Flow of Funds (Municipal Revenue Used in This Order) Also Called The Net Revenue Pledge
1. Operations and Facility Maintenance 2. Debt Service 3. Debt Service Reserve (1 year of debt service) 4. Reserve Maintenance Fund 5. Renewal and Replacement Fund 6. Surplus Fund *Called The Gross Revenue Pledge if Debt Service is Paid Before Operations and Maintenance.
Muni Bond Publications
1. The Bond Buyer - newspaper providing info and statistics about muni issues. 2. Munifacts - a wire service that provides general info about proposed muni securities and those in the secondary markets.
Basis Points
A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points, and 0.01% = 1 basis point.
Control Relationships
A control relationship with respect to a municipal security shall be deemed to exist if a broker, dealer, or municipal securities dealer (or a bank or other person of which the broker, dealer, or municipal securities dealer is a department or division) controls, is controlled by, or is under common control with the issuer of the security or a person other than the issuer who is obligated, directly or indirectly, with respect to debt service on the security.
Municipal Bond Auction Rate
A debt security with an adjustable interest rate and fixed term of 20-30 years. An auction rate bond's (ARB) interest rate is determined through a modified Dutch auction (where the price starts high and gets lower and lower until buyers are found) on a set schedule every seven, 14, 28 or 35 days.
The 25 Revenue Bond Index
A municipal bond index that measures the average yield 25 revenue bonds with 30 years to maturity, all with A rating or better.
The 11 Bond GO Index
A municipal bond index that measures the average yield of 11 muni GO bonds with 20 years to maturity, all with a rating of AA or better.
The 20-Bond GO Index
A municipal bond index that measures the average yield of 20 muni GO bonds with 20 years to maturity, all with a rating of A or better. Also called the "Bond Buyers Index".
The Municipal Bond Index
A municipal bond index that measures the average yield of 40 highly traded GO and revenue bonds with an average maturity or 20 years, all with a rating of A or better. Also called the "40 Bond Index".
The Placement Ratio
A municipal bond statistic showing the percentage of new issues this week as compared to new issues offered for sale the previous week.
The Visible Supply
A municipal bond statistic showing the total dollar amount of muni bonds expected to reach the market within the next 30 days.
MSRB
A regulating body that creates rules and policies for investment firms and banks in the issuing and sale of municipal bonds, notes and other municipal securities by states, cities and counties. Activities regulated by the MSRB include the underwriting, trading and selling of municipal securities financing public projects.
Real Time Reporting System
A requirement imposed on market makers (and in some instances, non market makers) to report each trade immediately after the transaction is completed.
ACATs
A system that facilitates the transfer of securities from one trading account to another at a different brokerage firm or bank. The National Securities Clearing Corporation (NSCC) developed the ACATS system, replacing the previous manual asset transfer system with a fully automated and standardized one.
Alternative Minimum Tax (AMT)
A tax calculation that adds certain tax preference items back into adjusted gross income. Alternative minimum tax (AMT) uses a separate set of rules to calculate taxable income after allowed deductions.
Municipal Bond Certificate of Participation
A type of financing where an investor purchases a share of the lease revenues of a program rather than the bond being secured by those revenues.
Zero Coupon Municipal Securities
A zero-coupon bond is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or have so-called "coupons", hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par (or face) value. Examples of zero-coupon bonds include U.S. Treasury bills, U.S. savings bonds, long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons.
Political Contributions
An MFP is an agent who is primarily engaged any of the following: Soliciting municipal underwriting Acts as a financial adviser or consultant Trading or selling municipal securities Provides investment advice or issues research reports relating to municipal securities to the public Direct supervisors of any agent acting in the above capacity Executives who oversee municipal dealers or departments An MFP may only make a political contribution to a candidate in an election where they are eligible to vote. The maximum amount of their contribution is limited to $250 per candidate per election. If an MFP donates more than $250 or makes a contribution to a candidate in an election they are not able to vote, a violation has occurred and the employing firm will be banned from engaging in municipal securities business with the issuer for two years.
Tax Exempt Commercial Paper
An unsecured short-term loan, usually issued to finance short-term liabilities, that provides the debt holders (bondholders) some level of tax preference on the earnings from their debt investment at a local, state or federal level.
Triple Tax Free Bonds
Bonds issued by US territories (including DC), the interest is not taxed at fed, state, or local level. In most cases, municipal bonds issued in your own state, the interest is triple tax free.
Municipal Bonds
Bonds issued by state governments, local governments or US territories. Investor money used to fund projects. Typically lower yields than other bonds because they are fed tax free. Better suited for investors in higher tax brackets. Tax advantage applies to interest only, not capital gains on the sale.
Tax and Revenue Anticipation Notes (TRANs)
Municipal notes that combine TANs and RANs.
Tax Anticipation Notes (TANs)
Municipal notes that provide financing for current operations in anticipation of future taxes the municipality will collect.
Construction Loan Notes (CLNs)
Municipal notes that provide interim financing for the construction of multifamily apartment buildings.
Project Notes (PNs)
Municipal notes that provide interim financing for the construction of subsidized housing for low income families.
Grant Application Notes (GANs)
Municipal notes that provide interim financing when they are waiting for a grant from the US gov. Paid from grant funds when received.
Bond Anticipation Notes (BANs)
Municipal notes that provide interim financing when they are waiting for long term bonds to be issued.
Net Direct Debt
Debt that a municipality obtained on its own from GO bonds and municipal notes. Revenue bonds not included because they are self supporting.
Refunding Methods
Direct Exchange? Advance Refunding? Refunding at Call Dates? Escrow to Maturity? Crossover Refunding?
Net Debt to Assessed Valuation
In a municipal bond issue, a ratio measuring the value of the municipality's net debt compared to the specified value of the real property being purchased as assessed for tax purposes.
Reoffering Yields
In a purchase and sale, the yield to maturity at which an underwriter offers to sell bonds to investors.
Insurer's of Municipal Bonds
MBIA, FGIC, AGC, and AMBAC * Muni bond insurance is purchased to insure the payments of principal and interest in the event the issuer defaults.
Municipal Bond Official Statement
Muni issuers don't have a prospectus, use the official statement instead. There's a preliminary (no offering price or coupon rate) and a final version issued. - States what the funds will be used for. - Info about the municipality - How the funds will be repaid. - The offering terms. - The underwriting spread. - A description of the bonds. - A description of the issuer. - The offering price (final). - The coupon rate (final). - The feasibility statement. - The legal opinion (or ex-legal without this).
General Obligation (GO) Bonds
Municipal Bond used to fund non-revenue producing facilities (school, libraries, police departments, fire stations, etc.) that do not bring in enough money to pay off the bond. - Backed by the taxes of the people living in the municipality. - Require voter approval.
Moral Obligation Bond
Municipal bond backed by a 'moral' pledge from the State, need legislative approval, are considered safer. Called this because the state has a moral responsibility, not a legal obligation.
Double-Barreled Bonds
Municipal bond is a mix of GO and revenue. If the revenue taken in isn't enough to pay off the debt, tax revenues make up the deficiency.
Public Housing Authority Bonds (PHAs)
Municipal bond issued by local housing authorities to build and improve low income housing. Only muni. backed by US Gov subsidies and therefore among the safest muni bonds.
Industrial Development Revenue Bonds
Municipal bond issued to finance the construction of a facility for a corporation that moves into the municipality. Backed by lease payments made by the corporation, therefore credit rating of the bond is the credit rating of the corp. Riskiest muni bond because backed by the corp and interest income not fed tax free for the investor, subject to AMT for the same reason.
Special Assessment (Special District) Bonds
Municipal bond issued to fund a specific construction project (sidewalks, streets, sewers, etc..) and are backed by taxes only from the properties that benefit.
Revenue Bonds
Municipal bond issued to fund facilities that generate enough income to support the bond. (Ex. utilities, toll roads, airports, hospitals, student loans). - Don't require voter approval (not backed by taxes). - Do require a feasibility study. - Involve covenants to be followed by the issuer to protect the investor. - Must provide financial reports and are subject to outside audits. - Catastrophe clause: muni uses insurance to call the bonds in case of catastrophic loss (ie. tornado, etc).
Special Tax Bonds
Municipal bond secured by one or more taxes other than ad valorem (property) taxes. May be backed by sales taxes on fuel, tobacco, alcohol, etc...
Limited Tax General Obligation Bonds (LTGO)
Municipal bond that is a type of GO bond for which the taxes backing the bond are limited. Secured by all revenues of the municipality that aren't used to back other bonds.
Revenue Anticipation Notes (RANs)
Municipal notes that provides financing for current operations in anticipation of future revenues the municipality will collect.
Tax-Exempt Commercial Paper
Municipal notes usually issued by organizations like universities with permission of the gov. Only last a few months to cover their short term liabilities.
Gifts
Municipal securities dealers can't give gifts valued at more than $100 per year to customers. Business expenses are exempt from this rule.
Official Notice of Sale
Municipalities place a request for underwriting bids, published in 'The Bond Buyer'
Trade Confirmations
Must be sent to the customer at or before the completion of the transaction (settlement date). Municipal securities settle three business days after the trade date. Confirmations include: - Broker-dealer name, address and phone. - Capacity (whether firm acted as broker or dealer). - Dollar amount of the commission (if broker). - Customers name. - Bond particulars (issuers name, interest rate, maturity, call features). - Trade date, time of execution and settlement date. - CUSIP number. - Any accrued interest. - The registration form (principal only, book entry, or fully registered). - Whether the bonds have been called or prefunded. - Any unusual facts about the security. - Bond yield and dollar price.
Debt Service Coverage Ratio
Net or Gross Revenues / Principal + Interest
90-Day Apprenticeship Period
New registered reps. can't engage in municipal securities business with the public for 90 days. Can only deal with securities professionals and cannot receive commissions (only applies to munis).
Commissions
No particular guidelines on what can be charged, but must be fair and reasonable. Cannot discriminate among customers.
Good Delivery
Occurs when a security's transfer is unhindered by restrictions or other issues that would prevent its delivery to the buyer. Good delivery is determined behind the computer screen, where securities may have certificates that require endorsements and registration requirements that must be met in order for the buyer to receive the transfer.
Overlapping Debt
Occurs when several authorities (municipalities) in a geographic area have the ability to tax the same residents. (ie. city, county and state). Those residents are responsible for debt from all three.
Allocation of Orders Priority
Orders that are routed to the trading post for execution are prioritized according to price and time. If the price of more than one order is the same, orders will be filled as follows: Priority: The order that was received first gets filled first Precedence: If the time and price are the same, the larger order gets filled. Parity: If all conditions are the same, the orders are matched in the crowd and the shares are split among the orders.
Municipal Bond Basis Price
Price quotation for a security expressed in terms of yield to maturity. This will usually only be quoted on fixed-income securities such as bonds.
Ad Valorem Taxes
Property tax charged to residents of a municipality. Always based on thousands of a dollar (0.001). Use assessed property value to calculate. Property Tax = Assessed Value x Tax Rate x 0.001
Doctrine of Reciprocal Immunity
Supreme Court rule that a level of government can tax only the interest of its own issues. Interest on munis can be taxed by state and local governments but not the Fed. Interest on Fed securities is taxed by the Fed but is exempt from tax from the state and local levels. Interest from US territory issues can be triple taxed by all three levels.
Build America Bonds
Taxable municipal bonds that feature tax credits and/or federal subsidies for bondholders and state and local government bond issuers. Build America Bonds (BABs) were introduced in 2009 as part of President Obama's American Recovery and Reinvestment Act to create jobs and stimulate the economy. BABs attempt to achieve this by lowering the cost of borrowing for state and local governments in financing new projects. Interest payments to the bondholders are taxable.
Municipal Equivalent Yield (MEY)
Tells the yield on a taxable bond after paying taxes. MEY = Municipal Yield x (100% - Investor's Tax Bracket)
Taxable Equivalent Yield (TEY)
Tells what the interest rate of a municipal bond would be if it weren't fed. tax free. Used to compare muni bonds and corp bonds. TEY = Municipal Yield / 100% - Investor's Tax Bracket
Capital Gains or Losses
The amount of capital gains to be taxed is calculated by subtracting the investor's cost from the sales proceeds.
Escrowed to Maturity
The condition of a bond that has been repaid in advance by means of an escrow account, which holds the funds needed to pay the periodic coupon payments and the principal.
Original Issue Discount (OID)
The discount from par value at the time that a bond or other debt instrument is issued. It is the difference between the stated redemption price at maturity and the issue price.
Municipal Bond Dollar Price
The percentage of par, or face value, at which a bond is quoted.
Municipal Notes
Used when municipalities need short term financing, maturities less than one year, usually three to five months.
When-Issued
When a corporate issuer declares a stock split, the stock will trade in the market place on a when-issued basis, prior to the distribution of the new shares. Sellers of the stock during this time may sell the stock on a when-issued basis or may deliver the old securities with a due bill attached for the new shares. Corporate securities sold on a when-issued basis will normally settle three business days after the securities are issued. Municipal securities that are sold prior to the certificate being available for delivery are sold on a when-issued basis. The purchaser will receive a when-issued confirmation and a final confirmation three days prior to the certificate's delivery.
Underwriters and Conflicts of Interest
When a firm acts as both the financial advisor and underwriter to an issuer, potential conflicts of interest arise. A broker dealer acting in a fiduciary capacity may not use the information obtained in the furtherance of their duties for their own benefit. Any investor, who purchases a new municipal issue from a broker dealer with a financial advisory relationship with the issuer, must be informed of the relationship in writing prior to the completion of the transaction.