Series 7- Municipal Securities
In what order are distributions paid under a net revenue pledge? I.The surplus fund. II.The debt service account. III.The operations and maintenance fund. IV.The debt service reserve account. A) III, II, IV and I. B) I, II, III and IV. C) III, IV, II and I. D) III, II, I and IV.
A) III, II, IV and I.
A municipal revenue bond indenture contains a net revenue pledge. The following are reported for the year: $30 million of gross revenues, $18 million of operating expenses, $4 million of interest expenses, and $2 million of principal repayment. What is the debt service coverage ratio? A) 2:1. B) 9:1. C) 3:1. D) 5:1.
A) 2:1 $30M - $18M = $12M $4M + $2M = $6M $12M/$6M = 2:1
A project that was funded with a revenue issue has been condemned by the state under an eminent domain proceeding. The outstanding bonds would be subject to which of the following call provisions? A) Prerefunding call. B) Refunding call. C) Defeasance call. D) Catastrophe call.
A) Catastrophe call
When syndicate members agree to share financial responsibility for any unsold securities on an undivided basis, this contractual arrangement comprises what type of account? A) Eastern. B) Selling group. C) Western. D) Best efforts.
A) Eastern
In municipal bond language, what is a workable indication? A) Likely bid. B) Indication that the issuer will probably award the winning bid to your underwriting syndicate. C) Likely offer. D) Indication that the managing underwriter will probably award your firm the number of bonds that it has requested.
A) Likely bid
Which of the following would have the least market risk? A) Revenue anticipation notes. B) Corporate or municipal bonds with long-term maturities. C) AAA corporate debentures. D) Fannie Maes.
A) Revenue anticipation notes
An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following EXCEPT A) they would require voter approval before a municipality could issue them B) the holder of a COP could foreclose on the asset generating the revenue in the case of default C) they are a form of municipal revenue bond D) the holder of the COP participates in lease or loan payments from a specific piece of equipment or facility purchased or built by the municipality
A) they would require voter approval before a municipality could issue them Certificates of participation (COPs) are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate.
All the following are used to provide debt service for revenue bonds EXCEPT: Excise taxes Business licenses taxes Ad valorem taxes Alcohol taxes
Ad valorem taxes These are used exclusively for GO bonds
The TIC method of evaluating municipal bids: A) is required by the MSRB if a financial advisory relationship exists. B) considers the time value of cash flows. C) is required by the MSRB if a control relationship exists. D) can only be used for term bonds.
B) considers the time value of cash flows.
If a customer buys callable municipal bonds, MSRB rules state that the confirmation sent to the customer must disclose the: A) yield that would result if the bonds were called midway between the date they become eligible to be called and their maturity date. B) lower of either the yield to call or yield to maturity. C) nominal yield only. D) higher of either the yield to call or yield to maturity.
B) lower of either the yield to call or yield to maturity.
An insured municipal bond is purchased by your client in the secondary market. After the sale, MSRB rules would require you to: A) include a copy of the insurance policy with delivery of the certificates. B) make delivery of the certificates accompanied by evidence of insurance, either on the face of the certificates or in a separate document. C) send a copy of the Official Statement. D) indicate that the bonds are insured on the confirmation because this is the only requirement.
B) make delivery of the certificates accompanied by evidence of insurance, either on the face of the certificates or in a separate document.
The placement ratio in "The Bond Buyer" indicates the relationship for a particular week between the number of bonds sold and the number of bonds: A) sold by competitive bid that week. B) offered for sale in the market that week. C) to be offered in the next 30 days. D) sold in negotiated underwritings that week.
B) offered for sale in the market that week.
Which of the following municipal securities could have been sold in a negotiated underwriting? A) School bonds. B) Limited tax bonds. C) All of these municipal issues. D) Industrial development bonds.
C) All of these municipal issues.
A customer in the 28% tax bracket owns a 9% ABC Corporation 20-year bond that currently is yielding 8.7%. He is considering buying tax-exempt securities. What is the comparable yield for a municipal bond? A) 0.0648 B) 0.1208 C) 0.06264 D) 0.125
C) 0.06264
Which of the following municipal issues would least likely involve overlapping debt? A) A school district. B) A library district. C) An airport district. D) A park district.
C) An airport district
Advertising relating to municipal securities must be approved by which of the following? A) The MSRB. B) A designated supervisory analyst. C) The SEC. D) A general securities principal or municipal securities principal.
D) A general securities principal or municipal securities principal.
You have a high-income client who wishes to maximize his after-tax interest income. Which of the following investments might NOT meet your client's objective? A) AA rated revenue bond. B) AA rated municipal note. C) AA rated GO bond. D) AA rated IDB.
D) AA rated IDB. Industrial development bonds are private purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.
Before a firm distributes a prepared summary official statement for a new issue of municipal bonds to customers, it must have the written approval of the: A) bond attorney. B) issuer. C) MSRB. D) firm's municipal securities principal.
D) firm's municipal securities principal.
The MSRB is authorized to adopt rules concerning all of the following EXCEPT the: A) form and content of price quotations. B) regulation of municipal securities advertising. C) sale of new issues to related portfolios. D) information to be provided by municipal issuers.
D) information to be provided by municipal issuers.
Net overall debt of a municipality is: A) funded debt plus overlapping debt. B) funded debt minus overlapping debt. C) net direct debt minus overlapping debt. D) net direct debt plus overlapping debt.
D) net direct debt plus overlapping debt.
What is coverage ratio?
The coverage ratio is specific to revenue bonds only and tells how many times annual revenue from that issue will cover the debt service of the issue.
What are state and local government securities series (SLGS)?
U.S. government securities issues by the Treasury to municipal issuers in connection with pre-fundings (we pre-fund bonds to lock in a low interest rate)
A municipal finance professional (MFP) is
an employee of a broker/dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker/dealer
Which of the following are TRUE of municipal securities quotations? I.A quotation can be an indication of interest. II.A quotation cannot be an indication of interest. III.A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted). IV.A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted). A) I and III B) II and IV C) II and III D) I and IV
A) I and III
The initial confirmation of a when-issued municipal bond contains which of the following?I. Number of bonds involved in the transaction. II. Settlement date. III. Yield to maturity. IV. Total dollar amount due. A) I and III. B) III and IV. C) II and IV. D) I and II.
A) I and III. On a new municipal bond offering, where the customer receives a when-, as-, and if-issued confirmation, the final settlement date is not known; therefore, the amount of accrued interest is unknown (because it is payable up to but not including settlement). Thus, the total dollar amount is unknown because it includes accrued interest. The number of bonds purchased and the yield to maturity (price) are known and must be included on the confirmation.
A municipal bond is offered at a discount. It has a 30-year maturity and is callable in 20 years at par. It is callable in 5 years at a premium and is puttable in 10 years at par. Which of the following yields would be quoted on this basis? A) Yield to the 30-year maturity. B) Yield to the 5-year call at a premium. C) Yield to the 20-year call at par. D) Yield to the 10-year put at par.
A) Yield to the 30-year maturity. Bonds that sell at a discount are always quoted as yield-to-maturity. This is the lowest possible net yield that the investor would make by holding the bonds until the issuer redeems them.
A person with no prior industry experience is hired by a municipal dealer to work as a clerk in its back office. Three months later this person is promoted to the firms sales desk to be trained in institutional sales. Under MSRB rules they are: A) not required to serve an apprenticeship period and may be promoted for sales training. B) required to have been in the position with the employing firm at least one year when previously employed in a clerical capacity only. C) required to serve a 60-day apprenticeship and having fulfilled that time may be promoted to sales training. D) required to serve a 30-day apprenticeship and may not yet be promoted to sales training.
A) not required to serve an apprenticeship period and may be promoted for sales training.
Your firm is interested in submitting a bid on a forthcoming general obligation municipal bond issue. Your firm could obtain the appropriate bid worksheets through a service provided by: A) the Bond Buyer. B) The Wall Street Journal. C) the MSRB. D) Standard & Poor's.
A) the Bond Buyer.
Municipal bonds are not normally sold short because: A) the municipal bond market is illiquid. B) short sales are prohibited by MSRB rules. C) the transaction is expensive to execute. D) short sales are prohibited by municipal statute.
A) the municipal bond market is illiquid.
Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority EXCEPT: A) the optional call provisions. B) the operations and maintenance. C) the debt service. D) the debt service reserve fund.
A) the optional call provisions. Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds.
A member of a $5 million Eastern account that has a $500,000 participation fails to sell $200,000 of bonds. At the close of the offering, if $1 million of bonds remains unsold, the member must take down: A) 200000. B) 100000. C) 500000. D) 300000.
B) 100000.
Which of the following are TRUE of the Bond Buyer Revenue Bond Index (Revdex)? I.It includes 30-year bonds. II.It includes 20 bonds. III.It is compiled weekly. IV.It is compiled monthly. A) II and III B) I and III C) II and IV D) I and IV
B) I and III
In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue?I. Presale orders. II. Designated orders. III. Member orders. IV. Group net orders. A) III, II, I and IV. B) I, IV, II and III. C) III, I, II and IV. D) IV, II, I and III.
B) I, IV, II and III.
Which of the following taxes are considered sources of debt service for revenue bonds? I.Ad valorem tax II.License taxes paid by businesses III.Special liquor and tobacco taxes IV.Real estate taxes A) III and IV B) II and III C) I and III D) II and IV
B) II and III Their main source of debt service funding is ad valorem (real estate) taxes
Which of the following would be found in the agreement among underwriters for a municipal bond offering? I. Legal opinion. II. Amount of the concession. III. Appointment of the bond counsel. IV. Establishment of the takedown. A) II and III. B) II and IV. C) I and III. D) I and IV.
B) II and IV.
In a municipal offering, which of the following would ordinarily be found in the agreement among underwriters? I.The legal opinion II.The appointment of the bond counsel III.The concession IV.The takedown A) I and II B) III and IV C) I and IV D) I only
B) III and IV Of the four answer choices only the concession and the takedown would generally be found in the agreement among underwriters which is found in the syndicate agreement. The agreement among underwriters does not include the legal opinion or the appointment of the bond counsel. The legal opinion and the appointment of the bond counsel would be found in the official statement.
The interest from which of the following bonds might be included in the alternative minimum tax calculation? A) General obligation bonds. B) Industrial development revenue bonds. C) TANs. D) Special assessment bonds.
B) Industrial development revenue bonds. Industrial revenue bonds (IRBs), sometimes called industrial development bonds (IDBs), may be nonpublic purpose bonds, and the proceeds are used to benefit private corporations. As such, the interest income from these bonds is a tax-preference item in the AMT calculation.
Which of the following may only be accomplished after applying the additional bonds test for a revenue bond? A) Spending revenues already allocated for project expansion. B) Issuing new bonds with an equal lien on the project's revenues. C) Increasing the project's user charges. D) Prerefunding an outstanding bond issue.
B) Issuing new bonds with an equal lien on the project's revenues.
Which of the following is TRUE of the visible supply in "The Bond Buyer"? A) It is a weekly listing of bonds sold in the past 30 days. B) It is a weekly listing of bonds to be offered in the next 30 days. C) It is a daily listing of available bonds. D) It is the total of the bonds offered in the Blue List.
B) It is a weekly listing of bonds to be offered in the next 30 days. The visible supply implies that the supply of bonds will be available for the visible future.
Which of the following does NOT participate in the syndicate (joint account) for a municipal underwriting? A) A financial advisor acting as a municipal securities dealer. B) The issuing municipality. C) A bank dealing in municipal securities. D) A municipal broker/dealer.
B) The issuing municipality.
All of the following must be considered by an investment adviser representative before recommending a municipal security to a customer EXCEPT: A) Customer's tax status. B) The municipality's coverage ratio. C) Customer's state of residence. D) Municipal security's rating.
B) The municipality's coverage ratio.
All of the following statements regarding municipal revenue bonds are true EXCEPT: A) no debt limitation is set by the issuing municipality . B) the maturity of the revenue bond will usually exceed the useful life of the facility being built. C) the interest and principal are paid from revenue received from the facility. D) revenue bonds can be issued by inter- or intrastate authorities.
B) the maturity of the revenue bond will usually exceed the useful life of the facility being built. Revenue bonds are usually structured so their maturity is shorter than that of the facility they were issued to build.
A municipal bond rating service would consider all of the following when evaluating a revenue bond EXCEPT: A) the debt service coverage ratio. B) the public's attitude toward debt. C) feasibility studies. D) operating revenues.
B) the public's attitude toward debt. Public attitude towards debt is only relevant when evaluating GO bonds
According to the MSRB rules, a registered representative can do all of the following EXCEPT: A) trade municipal bonds. B) train other registered representatives. C) sell municipal bonds. D) participate in underwriting municipal bonds.
B) train other registered representatives.
The visible supply may be found in the: A) Electronic "OTC Pink." B) "Bond Buyer." C) "S&P Bond Guide." D) "Wall Street Journal."
B) Bond Buyer The "Bond Buyer", a daily publication dealing primarily with the new issue municipal market, publishes information on the visible supply-the estimated amount of new municipal bonds to be sold over the coming month.
Which of the following are TRUE of a municipal bond broker's broker? I. Protects customer identity. II. Must disclose the identity of customers. III. Has no inventory. IV. Maintains an inventory. A) II and IV. B) I and III. C) I and IV. D) II and III.
B) I and III
In the underwriting of a municipal bond, which of the following is determined by the issuer rather than the underwriter? A) Net interest cost. B) Maturity. C) Underwriting spread. D) Yield to maturity.
B) Maturity
Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A) Catastrophe clause B) The issue's rating C) Flow of funds D) Call features
B) The issue's rating
The indenture of a revenue issue would ordinarily include which of the following covenants? I.Adequate insurance on the property II.An increase in property taxes if necessary to service the debt III.Proper maintenance of the property IV.Statutory debt limits A) II and III B) II and IV C) I and III D) I and II
C) I and III
A municipal dollar bond is quoted at 98¼ to 98¾. The municipal dealer's spread is equal to I.$5.00. II.$50.00. III.5 basis points. IV.50 basis points. A) II and IV. B) I and III. C) I and IV. D) II and III.
C) I and IV.
Which of the following would be considered in analyzing the credit worthiness of a revenue bond issuer? I. Per capita debt. II. Debt service coverage. III. Management. IV. Debt to assessed valuation. A) I and II. B) III and IV. C) II and III. D) I and IV.
C) II and III.
Rank the following in the usual sequence of order allocation. I. Syndicate. II. Member at the take down. III. Presale. IV. Designated. A) III, II, IV and I. B) I, II, III and IV. C) III, I, IV and II. D) II, IV, III and I.
C) III, I, IV and II.
A calamity (catastrophe) call may be made by a municipal issuer if A) the issuer has accumulated excess money in its surplus account B) interest rates have fallen C) a building constructed with revenue bond financing has been condemned D) the issuer is required to call outstanding bonds on a predetermined schedule as outlined in the bond contract
C) a building constructed with revenue bond financing has been condemned
All of the following are allowable municipal dealer quotes EXCEPT A) requests for bids only B) bona fide quotes C) an unidentified nominal quote D) requests for offers only
C) an unidentified nominal quote MSRB Rule G-13 requires municipal brokers and dealers to give bona fide bids and offers for municipal securities (bona fide quotes are those good for trading). It also allows for requests for bids (BW = bids wanted) and requests for offers (OW = offers wanted). A nominal quote (those for informational purposes only) is permissible, but only if it is identified as such.
According to MSRB rules, if a municipal securities broker/dealer receives an advisory fee from an issuer, it must notify in writing any of its customers purchasing bonds issued by that municipality of A) the placement ratio. B) a negative outlook from Standard & Poor's. C) any advisory relationship existing between itself and the issuing municipality. D) All of these.
C) any advisory relationship existing between itself and the issuing municipality.
A registered municipal securities representative may never: A) act as a broker. B) act as a buyer's agent. C) approve advertising. D) act as a sales agent.
C) approve advertising.
A quotation on a municipal security between dealers is assumed to be a(n): A) indication of interest. B) workable quote. C) bona fide quote. D) nominal quote.
C) bona fide quote.
The bond resolution includes all covenants between the: A) issuer and the MSRB. B) issuer and the bond counsel. C) issuer and the trustee acting for the bondholders. D) bond counsel and the bondholders.
C) issuer and the trustee acting for the bondholders.
Information found in the Bond Buyer would include all of the following EXCEPT A) REVDEX B) the placement ratio C) secondary market volume D) the 30-day visible supply
C) secondary market volume The Bond Buyer is a source of info for primary muni issues
In a competitive bid, which of the following would the issuer need to determine net interest cost? I. Coupon rates. II. Basis. III. Dollar price. IV. Spread. A) II and IV. B) I and II. C) I and III. D) III and IV.
C) I and III The coupon rate and dollar price are important to the issuer because they determine the actual cost of borrowing. The spread and basis at which the bonds will be resold are important to the underwriters, but not to the issuer.
Revenue bonds may be called for all of the following reasons EXCEPT: A) interest rates have fallen. B) the facility has been destroyed. C) the issuer has reached a statutory debt limit. D) a provision in a sinking fund agreement calling for a partial call.
C) Issue has reached a statutory debt limit
In its notice of sale in the "Bond Buyer", an issuer states that it will take into consideration the timing of interest payments when evaluating bids. The issuer will be using which of the following methods in its bid selection? A) Real interest cost. B) Net interest cost. C) True interest cost. D) Low interest cost.
C) Net interest cost
In rating a general obligation (GO) bond, all of the following factors would be considered by an analyst EXCEPT A) the tax collection ratio B) the public's attitude toward debt C) the flow of funds D) the total outstanding debt
C) flow of funds
Investor information about the financial condition of a municipal issuer is most likely found in the: A) legal opinion. B) official notice of sale. C) official statement. D) "The" "Bond Buyer".
C) official statement
A city and school district are coterminous. When evaluating the debt issues of the city, the school district debt would be considered: A) a double-barreled bond. B) secondary debt. C) overlapping debt. D) underlying debt.
C) overlapping debt
A registered representative mentions a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct? I.6% is the bond's coupon. II.6% is the bond's current yield. III.6.5% is the bond's yield to maturity. IV.6.5% is the bond's current yield. A) I and IV B) II and III C) II and IV D) I and III
D) I and III
The purchaser of a GO municipal bond should be concerned with I.property tax assessments II.the maintenance covenant III.market risk IV.feasibility studies A) II and III B) I and IV C) II and IV D) I and III
D) I and III GO bonds are issued by municipalities and, like all debt instruments, are subject to interest rate changes (market risk).
Which of the following statements regarding callable municipal bonds are TRUE? I. Call premiums tend to increase over time. II. Call premiums tend to decrease over time. III. Call prices are stated as a percentage of the principal amount to be called. IV. Call prices are stated as a percentage of the market value of the bonds to be called. A) II and IV. B) I and III. C) I and IV. D) II and III.
D) II and III.
Which of the following are TRUE of revenue bonds? I. They are secured by a specific pledge of property. II. They are a type of general obligation bond. III. They are not subject to the statutory debt limitations of the issuing jurisdiction. IV. They are analyzed primarily on the project's ability to generate earnings. A) I and II. B) I and IV. C) II and III. D) III and IV.
D) III and IV.
What is a bank-qualified municipal issue? A) An escrow receipt. B) One in which the bank guarantees the payment of interest and principal. C) One considered safe enough for a bank to invest in-same as investment grade. D) One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds.
D) One that receives preferential treatment by allowing a bank to exclude from gross income 80% of the interest expense incurred to carry the bonds.
All of the following statements regarding municipal bond official statements are true EXCEPT: A) all retail purchasers of a new municipal bond issue must receive a final official statement. B) a retail customer must receive an official statement no later than the settlement date. C) the MSRB does not require the preparation of a final official statement for new municipal bond issues. D) an official statement must be delivered only upon request of a retail customer.
D) an official statement must be delivered only upon request of a retail customer.
With respect to municipal discretionary accounts, all of the following statements are true EXCEPT A) all activity in the account must be reviewed at frequent intervals by a municipal securities principal B) a municipal securities principal must approve all transactions in the account promptly after execution C) unless a customer gives their express authorization, the broker/dealer cannot effect transactions to the customer's account for securities in which it has a control relationship with the securities' issuer D) if a control relationship exists between the broker/dealer and issuer, that relationship must first be terminated in order for the BD to effect transactions of the issuers securities in their customer's discretionary account
D) if a control relationship exists between the broker/dealer and issuer, that relationship must first be terminated in order for the BD to effect transactions of the issuers securities in their customer's discretionary account
An issuer may be able to diversify a single municipal bond issue by maturity because: A) every state issues municipal bonds. B) many municipal securities are very marketable. C) municipal securities are mostly long term. D) many municipal bonds are serial issues.
D) many municipal bonds are serial issues. Serial maturity means that within a single issue, portions of the issue mature at intervals. Municipal bonds typically mature serially.
According to MSRB rules, a separately identifiable division of a bank engaging in the sale and /or underwriting of securities issued by state and local governments is acting as a(n): A) broker's broker. B) mutual fund. C) investment banker. D) municipal securities dealer.
D) municipal securities dealer
All of the following might lead to an industrial development bond being called EXCEPT: A) interest rates are falling. B) funds are available in the surplus account to call the bond. C) the facility is destroyed by a storm. D) the municipality is approaching a statutory debt limit.
D) the municipality is approaching a statutory debt limit.
Which of the following projects is most likely to be financed by a general obligation rather than a revenue bond? A) Municipal hospital. B) Expansion of an airport. C) Public golf course. D) New high school.
D) New high school Hospitals, airports, and golf courses all generate revenue and can be financed with revenue bond issues. Schools are financed through GO bond sales.
You sell a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield must be stated as the yield to: A) maturity or yield to call, whichever is lower. B) maturity or yield to call, whichever is higher. C) maturity. D) call.
D) call MSRB rules require that, when a call date has been fixed by a prerefunding, the yield to call so fixed must be reflected on the confirmation statement
All of the following municipal securities are quoted on a yield basis EXCEPT: A) tax-anticipation notes. B) secured bonds. C) serial bonds. D) term bonds
D) term bonds
An official notice of sale publicizes each of the following EXCEPT: A) the issuer's name. B) the bond counsel's name. C) the amount of good faith deposit required. D) the bond's rating.
D) the bond's rating
The City of Podunk has an outstanding 25-year maturity issue that is callable in 7 years. It has prerefunded the issue and established an escrow account containing the proper government securities with face amounts and maturities approximating the call provisions of the original issue. In quoting the original issue, which of the following must be used? A) The lower of the yield-to-call or the yield-to-maturity. B) Current yield. C) Yield-to-maturity. D) Yield-to-call.
D) yield-to-call When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call.
All of the following are regulated by the MSRB EXCEPT: A) sales representatives. B) quotes. C) dealers. D) issuers.
Issuers
A city's day-to-day operational expenses may be met by the issuance of: A) CLNs. B) BANs. C) TANs. D) GANs.
TANS
