Solomon Exam Prep #1

Which of the following would be the most likely good-faith deposit amount for a $1,000,000 bid on a general obligation bond issue? A. $100,000 B. $50,000 C. $250,000 D. $20,000

$20,000 Bidders for a general obligation issue typically include a good faith deposit that is 2% of their total bid amount. In this case, that would result in a $20,000 good faith deposit.

Which of the following would you not find in a competitive bid offering? -The financial advisor helps to prepare the offering. -The underwriter helps structure the offering -Bond counsel provides an unqualified legal opinion. -Voter approval is received.

-The underwriter helps structure the offering With a competitive bid, the bond is already structured before the underwriter is chosen, so the underwriter will not help with that. The financial advisor can help to prepare the offering instead. Voter approval is required with competitive bid offerings, and bond counsel offers a legal opinion in both competitive and negotiated bids.

Which of the following is true of bonds? A. A bond's price will fluctuate with changes in interest rates B. Their coupon rates fluctuate with the market C. Rising interest rates will cause their prices to rise D. Interest rates and bond prices have no relationship to each other

A. A bond's price will fluctuate with changes in interest rates The price of a bond is related to changes in interest rates. That relationship is inverse in nature, meaning that when interest rates rise, the price of a bond falls, and when interest rates fall, the price of a bond rises. Coupon rates and par values for bonds will always stay the same and thus are not affected by changes in the market.

When authorizing a municipal bond, what might be a reason a qualified legal opinion is offered by the bond counsel? A. All of the other choices B. Information is missing from the Official Statement C. A lawsuit is pending which may affect legality D. The accounting method used is unusual

A. All of the other choices A qualified opinion might be made if certain important information is missing in the Official Statement, if the accounting method used does not follow generally accepted practices, or if a pending lawsuit might potentially affect an issue's future legality.

The city of Campton has engaged in a swap arrangement with a swap dealer. Under the terms of the swap arrangements, the swap dealer makes variable-rate payments of LIBOR + 1% to Campton. Campton is paying a variable rate of SIFMA + 1% to its bondholders. Which type of risk is Campton subject to under this arrangement? A. Basis risk B. Counterparty risk C. Market access risk D. Interest rate risk

A. Basis risk Basis risk is the risk that the variable rate paid by the issuer to its bondholders will differ from the swap rate. This can happen when the floating rate of the bond is based on a different index than the floating swap rate, as is the case here. For Campton the risk would be that the SIFMA drops below the LIBOR, in which case the city would be paying its bondholders more than it would be receiving from the swap dealer. Interest rate risk is the risk that general changes in interest rates will obligate the bond issuer to pay a higher amount over time. Counterparty risk is the risk that the counterparty in a swap agreement will default on its payments. Finally, market access risk is the risk that an issuer will not be able to obtain a favorable derivatives contract when it needs to in the future.

John the trustee creates a creditors' committee to represent Snowy Falls' largest creditors. Which of the following may this committee not do? A. Cause Snowy Falls to liquidate enough of its assets to make its debt payments B. Participate in forming the bankruptcy plan C. Meet with the leaders of Snowy Falls to discuss administration of the bankruptcy proceeding D. Examine Snowy Falls' financial information

A. Cause Snowy Falls to liquidate enough of its assets to make its debt payments Neither the court nor the creditors' committee can force the municipality to liquidate its assets. However, the creditors' committee may meet with the municipality, help to form the bankruptcy plan, and examine the municipality's finances.

Cloverton issues a bond that was approved by voter referendum. Which of the following are most likely true of the bond? I. The bond is a secured bond. II. The bond is an unsecured bond. III. The bond is backed by a collateralized asset of the issuer. IV. The bond is backed by the full faith and credit of the issuer. A. II and IV B. I and IV C. I and III D. II and III

A. II and IV If the bond required voter approval, then it probably was a general obligation bond, also called an unsecured bond because it is not backed by collateral. Even though they are not backed by collateral, GO bonds are considered safe because they are backed by the full faith and credit of the issuer, which comes with the ability to raise taxes if required.

Rank the following yields for a premium bond from highest to lowest: I. Yield to call II. Coupon rate III. Yield to maturity IV. Current yield A. II, IV, III, I B. IV, I, III, II C. III, I, IV, II D. I, III, IV, II

A. II, IV, III, I For a premium bond, the nominal coupon rate will always be the highest, followed by the current yield, the yield to maturity, and the yield to call. Discount bonds are ranked in the exact opposite order.

Goodville is a fixed-rate payer in a swap. The variable rate on the swap is based on LIBOR. Goodville will want the LIBOR rate to do which of the following? A. Rise B. Fall C. Remain the same D. More information is needed to answer this question

A. Rise For Goodville, a rise in interest rates will increase the value of the swap, while a drop in interest rates will reduce the value of the swap. Thus a rise in the LIBOR rate would be desirable.

In a municipal competitive bid authorization process, which document would include information regarding amount and terms of bonds as well as preliminary pricing that will be offered to investors? A. Syndicate letter B. Notice of Sale C. Bond resolution D. Bid form

A. Syndicate letter To get the broadest possible view of the market and reach the maximum number of prospective bidders, underwriters will form a syndicate prior to securing a competitive bid. Once the team is selected, the lead underwriter will draft a syndicate letter. This letter describes the obligations of each member, the share of the members' participation in the underwriting, and how bond orders will be handled. Also, it specifies the amount and terms of the bonds to be issued, including the preliminary prices the syndicate will offer potential investors, as determined by the managing underwriter.

The risk that an investment will not be able to be turned into cash is referred to as A. liquidity risk B. asking risk C. credit risk D. market risk

A. liquidity risk Liquidity risk refers to the potential difficulty of converting an investment into cash. Market risk, or systematic risk, refers to the risk that the entire market will decline, and hence the value of a specific investment will decline with it. Credit risk refers to the risk that a particular company may default on their bond payments. Asking risk is a made up term.

The first calendar quarter of the year ends on March 31. When does the MSRB require firms to report on their political contributions for this quarter?

April 30 To monitor compliance with the pay to play rule, the MSRB requires dealers and advisors to submit quarterly statements reporting all of their political contributions for the previous quarter, whether made by MFPs, MAPs, or otherwise. They must also list all the issuers with whom they engaged in municipal securities business activities for the quarter. Reports must be filed on Form G-37 and sent to the MSRB by the last day of the month following the end of each calendar quarter. The calendar quarters are January-March (Form G-37 due April 30), April-June (Form G-37 due July 31), July-September (Form G-37 due October 31), and October-December (Form G-37 due January 31).

The decimal equivalent of a basis point is: A. 0.00125 B. 0.0001 C. 0.001 D. 0.01

B. 0.0001 A basis point is one-hundredth of one percent, or .0001.

The town of Sharpsville plans to issue a long-term bond for a capital project, but is still in the process of working out the final costs. Since they need to begin work as soon as possible, which of the following would Sharpsville most likely issue? A. Construction loan notes B. Bond anticipation notes C. Tax anticipation notes D. Grant anticipation notes

B. Bond anticipation notes BANs enable work to start on a capital project before the municipality completes its issuance of a long term bond. Rather than issue bonds before the project is finished and final costs are known and certain, a municipality may sell notes that will be retired by proceeds from the new bond issue.

All of the following are required if a municipal advisor wishes to retain records electronically EXCEPT: A. The advisor can reasonably safeguard the records against loss B. Data must be accessible in less than 5 business days C. Only designated personnel have access to the records D. The records can be reproduced in an accurate manner

B. Data must be accessible in less than 5 business days Electronic storage of records is permitted as long as the advisor can reasonably safeguard them against loss, make sure that only designated personnel have access, and the records can be reproduced in an accurate manner.

Which of the following are true? I. Term bonds generally have a sinking cost fund. II. Serial bonds generally have a sinking cost fund. III. Term bonds generally have a debt service reserve fund. IV. Serial bonds generally have a debt service reserve fund. A. II and IV B. I and IV C. I and III D. II and III

B. I and IV Term bonds usually have a sinking cost fund to set money aside to buy back callable bonds. Serial bonds do not need a sinking fund, since part of the bond issue comes due every year, so instead they use a debt service reserve fund to set money aside in case the debt service fund is insufficient to make a future payment.

What is the period of time before a CMO investor will begin receiving principal payments? A. Holding period B. Lockout period C. Blackout period D. Stalling period

B. Lockout period The lockout period is the time before the investor begins receiving principal payments.

Who operates EMMA? A. SEC B. MSRB C. NASAA D. FINRA

B. MSRB The MSRB operates the Electronic Municipal Market Access (EMMA®) website. EMMA is the official repository for information on municipal securities. It provides investors and the public with free access to official disclosures, including plan disclosure documents for 529 savings plans.

Anticipation notes are: A. Notes that the issuer can call back before maturity B. Notes that will be paid back from a future source of funds C. Securities that can be redeemed for municipal bonds D. Notes that will pay a greater amount under certain specified circumstances

B. Notes that will be paid back from a future source of funds Municipal notes are called anticipation notes, because they are issued in anticipation of an expected source of income that will make the periodic payments on a bond. Anticipation notes allow a project to get underway before its funding has been received.

The duties of care and loyalty apply to which of the following? Choose the best answer. A. All municipal advisors B. Only non-solicitor municipal advisors C. Only municipal advisors who solicit a municipal entity D. Only municipal advisors registered with the MSRB

B. Only non-solicitor municipal advisors The duties of care and loyalty, which are important parts of MSRB Rule G-44, apply to non-solicitor municipal advisors. Non-solicitor municipal advisors are firms that provide advice on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities. The duties do not apply to municipal advisors that solicit a municipal entity. All municipal advisors are required to register with both the SEC and the MSRB.

The most common way to retire a bond is to: A. Conduct a current refunding B. Pay it off at maturity C. Buy it back on the open market and cancel it D. Be forced to redeem it by a bondholder exercising a put option

B. Pay it off at maturity A bond is retired when the issuer owes nothing more to the bondholder. The most common way for a bond to be retired is by reaching maturity. Different methods are available for retiring bonds early, depending on the features written into the bond indenture when the bonds were issued, the financial condition of the issuer, and interest rates.

Under which of the following categories would you put a fund for a gas utility company? A. Governmental funds B. Proprietary funds C. Debt service funds D. Fiduciary funds

B. Proprietary funds There are three main types of funds for which municipalities prepare financial statements: governmental funds, proprietary funds, and fiduciary funds. Proprietary funds are for organizations like utility companies that cover their costs with their own revenues.

The beneficiary of a 529 college savings plan: A. Must be related to the contributor B. Should be planning to attend an eligible elementary, secondary or post-secondary educational institution C. Must be under 30 years old D. Can never be the contributor

B. Should be planning to attend an eligible elementary, secondary or post-secondary educational institution Contributors designate the initial beneficiary. The beneficiary may be anyone who plans to attend an eligible elementary, secondary or post-secondary educational institution. Eligible educational institutions include any high school, college, university, technical or vocational school, or any other educational institution that is able to participate in a student aid program administered by the U.S. Department of Education. While 529 plans were originally designed for college, up to $10,000 may now be applied to the tuition of an elementary or secondary institution. There is no age limit on the beneficiary, and the contributor does not have to be related to the beneficiary. Contributors can even set up a 529 plan for themselves.

According to Standard & Poor's, which rating would be considered to have significant speculative characteristics? BB A C+ Ba

BB According to Standard & Poor's, BB and below is considered to have significant speculative characteristics. 'Ba' is a distinction of Moody's rating system and C+ is not a valid rating.

A municipal bond is bought and sold within 10 months. The owner realizes a capital gain on the sale. The gain will: -Be taxed as a short-term capital gain -Not be taxable -Be taxed at the municipal security rate -Be taxed as a long-term capital gain

Be taxed as a short-term capital gain While the interest on municipal securities are tax-exempt, capital gains realized on the sale of security are taxed as capital gains. Because the security was held for one year or less it will be taxed as a short-term capital gain. Short-term capital gains are taxed at a tax-payer's ordinary income rate.

Which of the following represents 20 basis points? A. 0.2000 B. 0.0200 C. 0.0020 D. 0.0002

C. 0.0020

The annual coupon payment of a bond divided by its market price is: A. Yield to maturity B. Yield to call C. Current yield D. Nominal yield

C. Current yield Current yield gives an estimation of the return an investor will receive on a bond if it is purchased today and held for a year. Nominal yield, or coupon rate, is the interest rate of the bond, and it does not change. Yield to maturity is the rate of return over the life of the bond, given its current market value. Yield to call is similar to yield to maturity, but it assumes the investor will only hold the security until the first call date, not until maturity.

The city of Wrightville issues $10,000,000 in GO bonds with a coupon payment fixed at 5%. Shortly after the issue date, the city becomes concerned that interest rates will drop significantly at some point in the future, so it contacts a swap dealer. Based on Wrightville's concerns, which of the following represents its best possible course of action? A. Engaging in a basis swap B. Engaging in a floating-to-floating rate swap C. Engaging in a floating-rate swap D. Engaging in a fixed-rate swap

C. Engaging in a floating-rate swap In this case, Wrightville's best course of action would be to set up a swap arrangement by which it could make floating rate payments in exchange for payments at a fixed rate. Such an arrangement is known as a floating-rate swap. In contrast, a fixed-rate swap involves a municipality receiving a floating-rate payment from a swap dealer while paying that dealer a fixed rate. A basis swap occurs when two floating rates are exchanged. This type of swap is also known as a floating-to-floating rate swap.

A contractionary monetary policy causes all of the following to decrease EXCEPT: A. Exports B. Investment C. Interest rates D. Consumption

C. Interest rates When the Fed tightens the money supply, it does this by selling government securities, increasing reserve requirements and the raising the target federal funds rate and discount lending rate. Additionally, the Fed may affect the money supply and the economy by its control of margin requirements and by moral suasion, also known as jawboning. When there is less money available, interest rates rise causing investment and consumption to drop as borrowing becomes more expensive. Higher domestic interest rates make US investments more attractive to international capital which increases demand for the dollar and causes the exchange rate to rise. When the dollar is worth more, US exports cost more to foreign buyers and so exports decline.

State A offers a 529 plan. What is State A considered to be? A. Primary distributor B. Sponsor C. Issuer D. Municipal securities dealer

C. Issuer State A is considered to be the issuer of the 529 plan. The primary distributor is the underwriter of the plan (this is sometimes referred to as the sponsor). The municipal securities dealer is a dealer who sells the 529 plan.

The risk that an investment will lose its value due to an overall decline in the market is called: A. Inflation risk B. Interest rate risk C. Market risk D. Specific risk

C. Market risk Market risk refers to the tendency of a downward trend in the overall investment market to depress individual securities.

Which of the following is least likely to be included in a Notice of Sale? A. Structure of the issue B. Amount of the proposed sale C. Name of underwriter D. Whether the issuer has a qualified or unqualified legal opinion

C. Name of underwriter A Notice of Sale is posted for a competitive bidding process as a way to solicit potential underwriters to make a bid, so the underwriter has not yet been chosen when the Notice of Sale is posted.

"Systematic risk" refers specifically to: A. Risk within a sector of the market B. Risk associated with liquidity C. Overall market risk D. Insufficiency of fundamental analysis

C. Overall market risk "Systematic risk" is also known as "market risk" or "stock market risk". It is the risk that an investment may lose value as a result of overall market decline.

Regarding CMOs, which tranche provides the most protection against prepayment risk: A. AFLAC tranche B. Z-Tranche C. TAC tranche D. PAC tranche

C. TAC tranche Collateralized Mortgage Obligations (CMO's) are pools of mortgages packaged into tranches to spread out risk. An owner of a planned amortization class (PAC) tranche is guaranteed a fixed amortization payment, as long as prepayments by mortgage holders stay within a certain range. This protects against unexpected income due to greater-than-expected repayments of principal up to 300% PSA (prepayment or contraction risk) and also protects against lower than expected income due to fewer people prepaying mortgages (extension risk). A target amortization class (TAC) tranche also is guaranteed a fixed amortization payment as long as prepayments stay within a certain range. However, this range includes no protection at all against extension risk. Prepayment risk (contraction risk) is given complete protection, up to 300% PSA and beyond. Any excess prepayment, no matter how great, is allocated to the companion tranches. Zero-Tranches (Z-Tranche) have the longest life and are most volatile; all other tranches are paid out first. Z-tranches are a zero coupon bond that pays no principal or interest until the higher priority bonds are completely paid off. The deferred interest is added (accrued) to the principal amount due the Z-bond. Once the other classes are fully paid, it begins to receive principal and interest. Z-tranches protect against reinvestment risk because in the early years, the investor does not receive interest and principal, but it does not protect against prepayment risk later in the investment's life. AFLAC has nothing to do with CMOs, they offer supplemental insurance . . you know, the duck commercials.

When an underwriter purchases securities at a discount using a net interest cost (NIC) bid form, which of the following is true? A. None of the other answers B. The purchase will be treated as a face value purchase when determining interest cost C. The discount amount must be added to the interest cost D. The discount amount must be subtracted from the interest cost

C. The discount amount must be added to the interest cost In both a net interest cost (NIC) and true interest cost (TIC) form of bid, the interest cost calculation includes any discount or premium to the public offering price. So if the underwriters purchase the securities from the issuer at a discount, that number must be added to the interest cost. On the other hand, if the underwriters purchase the securities at a premium, that number must be subtracted from the interest cost.

Which of the following is true of defined benefit pension plans? A. Defined benefit plans provide for a specific amount to be paid by the employer during the employee's term of employment. B. Total pension liability is the total amount owed to employees for a given year. C. The net assets of a pension plan are also known as the plan net position. D. Cost-sharing multiple-employer pension plans take contributions from different employers and invest them together but essentially keep the funds in separate accounts.

C. The net assets of a pension plan are also known as the plan net position. Defined benefit plans provide employees with a specific amount of benefits after retirement. Plan net position refers to the net assets of a pension plan. Total pension liability is the entire amount owed to employees in the future. If it exceeds plan net position, there is a net pension liability. In a cost-sharing multiple-employer pension plan, contributions are pooled together and can be used to pay any employee of any of the employers who have made contributions.

The town of Mirrorvale has a population of 1,000 and has $2 million in outstanding general obligation bonds, $1 million in outstanding revenue bonds, and $1 million in cash and reserves. In addition, its citizens owe a total of $2 million for debt service to Glade County. What is Mirrorvale's net debt per capita? A. $4,000 B. $1,000 C. $2,000 D. $3,000

D. $3,000 Net Overall Debt is a combination of Net Direct Debt and Overlapping Debt. Net Direct Debt is defined as the short- and long-term general obligation debt less cash and cash equivalents. Overlapping Debt is debt issued by municipalities that have overlapping geographic boundaries. Mirrorvale's Net Direct Debt is $1 million, its general obligation debt less its cash and cash equivalents. Because the revenue bonds are self-supporting and not a direct obligation of the taxpaying public, they are not included in the measurement. The overlapping debt owed the county is $2 million, so the sum of its net direct debt and the overlapping debt is $3 million. $3 million / 1,000 residents = $3,000 per capita.

Which of the following would not be considered an example of an expert work product (EWP)? A. An auditor's report that makes economic projections related to a municipal issue B. A study that analyzes a project's likelihood of meeting its debt obligations C. An appraisal of the value of real estate associated with a municipal issue D. A lawyer's review of blue sky laws and their general effect on municipal issuers

D. A lawyer's review of blue sky laws and their general effect on municipal issuers Expert work products (EWPs) include feasibility studies, real estate appraisals, economic projections and analyses, independent auditors' reports, and other such studies that an issuer might include in an official statement or continuing disclosure documents. They are related to a specific issue and are intended to provide information and research about a proposed project. A general legal analysis would not fit this description.

A document in which an investor acknowledges that they understand the risks associated with securities being purchased, affirms their status as a sophisticated investor, and states that they are financially able to bear any economic loss that may result from a potential purchase is known as which of the following? A. A bond resolution B. An offering memorandum C. A trust indenture D. A private placement letter

D. A private placement letter A private placement letter, also called an investor letter, is issued during a private placement. In it an investor acknowledges that they understand the risks associated with a given security and are able to withstand any negative outcome associated with those risks.

A leasehold revenue bond is secured by revenue from the lease of certain property. What provision in the lease would relieve a lessee from making lease payments in cases where the property cannot be used? A. Surety Clause B. Payment Relief Clause C. Kinsman Clause D. Abatement Clause

D. Abatement Clause An abatement clause is a provision of a lease that relieves a lessee from making lease payments if the property cannot be utilized. All the other choices are fictional titles.

The Federal Reserve Board wants to stimulate the U.S. economy. In order to do so it purchases government securities. What is the most likely outcome of this policy? A. A reduced money supply will raise interest rates, lowering the price of municipal bonds in the secondary market. B. An increased money supply will cause interest rates to drop, driving down the price of municipal bonds in the secondary market. C. A reduced money supply will raise interest rates, raising the price of municipal bonds in the secondary market. D. An increased money supply will cause interest rates to drop, raising the price of municipal bonds in the secondary market.

D. An increased money supply will cause interest rates to drop, raising the price of municipal bonds in the secondary market. When the Fed purchases government securities, it makes more money available and credit easier to obtain. This helps drive interest rates down. Since the interest payments on fixed-rate municipal bonds are constant, they would now be higher than the going interest rate, and thus they would be more appealing to investors. As a result, those bonds would experience an increase in market value in the secondary market.

Concerning municipal bonds issued by the city of Dover, Delaware, which of the following are not true: I. If you live in Delaware, the interest is exempt from state and federal taxes II. If you live in Virginia, the interest is taxable at both the state and federal level. III. If you live in the state of Delaware, you will not pay federal capital gains tax on any profits you realize when you sell the bonds IV. If you live in the state of Virginia, you will pay federal capital gains tax on any profits you realize when you sell the bonds. A. I and IV B. II and IV C. I and III D. II and III

D. II and III Interest income earned on municipal bonds is not taxable at the federal level, and only taxable at the state level outside the state of their issuance. Capital gains realized upon the sale of such bonds are subject to capital gains tax regardless of the taxpayer's state of residence.

Snowy Falls has engaged in a fixed payer swap agreement with Great Bank for $5 million. Which of the following is true? A. Snowy falls must post margin to Great Bank based on CFTC regulations. B. If interest rates fall more than expected, Snowy Falls will record the value of the swap as an asset on its books. C. Snowy Falls will calculate the MTM value of the swap each day, and depending on the value, either pay Great Bank or receive money from Great Bank daily. D. If interest rates rise more than expected, Snowy Falls will record the value of the swap as an asset on its books.

D. If interest rates rise more than expected, Snowy Falls will record the value of the swap as an asset on its books. Snowy Falls is the fixed payer in this context. During the course of the swap contract, both parties will calculate the mark-to-market (MTM) value of the swap to determine its worth on the company's balance sheet. -The MTM value is simply the value of the swap given current interest rates. If current interest rates rise more than expected, this is better for the fixed payer, in this case, Snowy Falls. The rise in interest rates will cause the value of the swap to become positive for Snowy Falls, and it will be recorded as an asset on Snowy Falls' balance sheet. When a party holds a swap with a positive value it opens the holder (Snowy Falls) up to default risk (also called counterparty risk). This is because Great Bank may not pay the money it owes Snowy Falls. Parties to swaps do not have to post margin unless they are a very large institution with extremely large amounts of swap deals. While both parties to the swap may calculate their MTM value each day, payments are only exchanged at the end of a set period (usually every 6 months).

Concerning municipal bonds issued by the city of Baltimore, Maryland: A. If you live in the state of Virginia, you will not pay state tax on the interest you earn B. If you live in the state of Maryland, you will pay state tax on the interest you earn C. If you live in the state of Virginia, you will not pay federal capital gains tax on any profits you realize when you sell the bonds D. If you live in the state of Maryland, you will pay federal capital gains tax on any profits you realize when you sell the bonds

D. If you live in the state of Maryland, you will pay federal capital gains tax on any profits you realize when you sell the bonds Interest income earned on municipal bonds is not taxable at the federal level, and only taxable at the state level outside the state of their issuance. Capital gains realized upon the sale of such bonds are subject to capital gains tax regardless of the taxpayer's state of residence.

Brad transfers from a municipal securities position to one that does not involve municipal securities. Under the pay to play rule's look-forward provision, how long after the transfer can Brad potentially trigger a ban on business for his firm? A. Two years B. Five years C. Six months D. One year

D. One year The pay to play rule has a look-forward provision that comes into play when an MFP or MAP transfers to another position within his firm, in which he is no longer an MFP or MAP. For one year after the transfer, he continues to count as an MFP or MAP for purposes of whether he can trigger the ban. During this year, if he makes a contribution that triggers the ban, the ban lasts for two years, just as if he had made the contribution before changing positions.

Which of the following is not true of swaptions? A. The holder of a swaption pays a premium to the counterparty B. They are used to hedge against changing interest rates C. They allow for a good deal of flexibility since the holder is never required to enter into a swap D. Swaptions carry the same level of risk as interest rate swaps

D. Swaptions carry the same level of risk as interest rate swaps A swaption's holder pays a premium to the counterparty in order to have the right to enter into an interest rate swap. Though the holder is never required to enter into the swap, swaptions provide a useful hedge against the prospect of rising interest rates. In essence, a swaption ensures protection against a rise in interest rates without requiring the holder to engage in many of the risks that are inherent to interest rate swap contracts.

What is the bond coupon? A. the amount of interest that accrues on government bonds B. the difference between the face amount of the bond and its cost C. the paper the bond is printed on D. the interest rate for a bond

D. the interest rate for a bond The coupon is the interest rate earned by a bond.

The price of a bond with a duration of 10 will roughly: -Increase 1% for every 10% decrease in interest rates -Decrease 1% for every 10% increase in interest rates -Increase 10% for every 1% increase in interest rates -Decrease 10% for every 1% increase in interest rates

Decrease 10% for every 1% increase in interest rates Duration is a measure of a bond's sensitivity to small changes in interest rates. A bond with a duration of 10 would decrease in value by approximately 10% for every 1% that interest rates went up.

A feasibility study will be done prior to issuing a: A. moral obligation bond B. GO bond C. housing bond D. revenue bond

For a revenue bond can be issued, a feasibility study will need to be conducted. A feasibility study is a study that evaluates all pertinent factors relating to the issuer's ability to generate revenue. The study must show that the issuer will most likely be able to meet its payment obligations from the revenue that is generated from the project.

Any municipal securities dealer that submits a ___________ order to a syndicate (or a member of a syndicate) shall disclose at the time of the submission, the identity of the person for whom the order was submitted. -Pre-sale -Designated -Group -Member

Group According to MSRB rule G-11, every broker, dealer or municipal securities dealer that submits a group order to a syndicate or to a member of a syndicate shall disclose at the time of submission of such order the identity of the person for whom the order was submitted.

For which TWO of the following issuers might a CAB be suitable? I. An issuer that is not allowed to increase its tax rates past a certain percentage of assessed property value II. A municipality that expects substantial growth over the next ten years III. An issuer funding a project that provides a steady, dependable revenue stream IV. An issuer that would like to cut its long-term costs associated with debt service

I and II -Capital appreciation bonds (CABs) tend to be more expensive than traditional current interest bonds, so they are not suitable for an issuer wishing to cut costs -Since the debt service on a CAB is deferred until the end of the life of the bond, they tend not to be suitable for projects that provide immediate, steady streams of revenue. -However, because the debt service on a CAB does not count against an issuer's debt limit, CABs allow issuers to issue bonds that they cannot currently afford to pay. So if an issuer expects substantial growth in the future, CABs can allow an issuer to raise money without exceeding its debt limit or raising taxes.

Suppose a municipality has $5,000,000 of variable rate demand obligations that have a 10-year maturity. Interest rates fall significantly, and they are expected to fall even further over the next year. The municipality is happy. But the municipality expects interest rates to rise after two years. What would be the best options for the municipality? I. Enter into a floating to fixed swap II. Enter into a forward swap III. Purchase a payer swaption IV. Purchase a receiver swaption

II and III A forward swap allows the municipality to enjoy the low rates now and also to lock into rates for the future. A payer swaption gives the municipality the right to enter into the swap at a fixed rate in the future if it chooses. Thus, if interest rates rise, it will exercise the option. If interest rates fall, it will let the swaption expire. While a floating-to-fixed rate swap would allow the municipality to hedge against interest rate risk, it would not allow the municipality to fully take advantage of the lower rates in the next year. A receiver swaption would give the municipality the right to pay variable rate payments which would not help them.

An LGIP is classified as a(n): I. Investment company II. Trust III. Municipal fund security IV. Municipal bond fund

II and III A municipal fund security is a fund of securities that is issued by a state or municipality. Investments in a municipal fund may consist of a wide variety of securities, including corporate stocks and bonds and government securities of every stripe. It is not to be confused with a municipal bond fund, which is a mutual fund consisting entirely of municipal bonds. A municipal fund security is distinguished from the typical investment company by its issuer. Local Government Investment Pools are trusts, established by state and local governments, that offer municipal entities a place to invest their money. Government entities use their surplus cash to purchase interests in a trust, which invests the assets in a large portfolio of securities, according to the trust's investment objectives and state laws. Only municipal governments and their instrumentalities may invest in these trusts. LGIPs are not open to investment by the public. While LGIPs are similar to mutual funds, they are not subject to regulation under the Investment Company Act. In particular, they generally do not have to register with the SEC, prepare a prospectus and official statement, or calculate net asset value on a daily basis. Municipal securities dealers that market LGIPs are also exempt from the Investment Company Act, but they must comply with MSRB rules.

The city of Leadville has a GO bond with a duration of 10. The city of Copperville has a similar GO bond with a duration of 8. Which of the following are true? I. If interest rates fall by 1%, Leadville's bond price will decrease by about 10%. II. If interest rates rise by 1%, Copperville's bond price will decrease by about 8%. III. Copperville's bond is more sensitive to interest rate changes than Leadville's bond. IV. Leadville's bond is more sensitive to interest rate changes than Copperville's bond.

II and IV Duration measures the sensitivity of a bond's price to change in interest rates. A duration of 10 means that a 1% change in interest rates will result in about a 10% change in price. Since price and interest rates have an inverse relationship, for Leadville's bond, a 1% increase in interest rates will result in a 10% decrease in price. For the Copperville bond with a duration of 8, if interest rates rise by 1%, the price will fall by about 8%. Because the Leadville bond has a higher duration than the Copperville bond, it is more sensitive to interest rate changes.

A Build America Bond may I. provide a 35% subsidy on the interest as a tax deduction II. reimburse the issuer for 35% of the interest paid to investors III.. provide a 35% subsidy on the interest as a tax credit IV.. provide a 35% subsidy on the interest as an additional interest payment

II or III Build America Bonds (BABs) come in two types according to how the subsidy is paid: it may come in the form of direct payment or a tax credit. 1) With Direct Pay BABs, the federal government reimburses the issuer 35% of the interest paid to investors. 2) With Tax Credit BABs, the 35% subsidy comes to investors in the form of a tax credit on their interest income.

Most swap agreements use a standardized document that exhaustively outlines the terms and conditions of the deal. The name of this kind of document is: -Guaranteed Swap Investment contract -International Swaps and Derivatives Association master agreement -Municipal Securities Rulemaking Board swap covenant -Commodity Futures Trading Commission contract

International Swaps and Derivatives Association master agreement Most swap agreements use an ISDA (International Swaps and Derivatives Association) master agreement, which is a standardized document that exhaustively outlines the terms and conditions of the deal. None of the other answer choices represent actual contractual arrangements related to swaps

Snowy Falls wants to issue a GO bond, but the city is worried that interest rates will drop a few years after the bonds are issued. What kind of call option is the best choice for this bond issue? -Extraordinary -Sinking fund -Optional -Make whole

Optional 1) Optional redemptions allow the issuer to redeem bonds early at specified times, and they are helpful when the issuer isn't certain that the bond issue will need to be redeemed. These redemptions are often used when interest rates have fallen and the issuer would like to reissue bonds at the lower interest rate. 2) A sinking fund redemption is a kind of mandatory redemption that requires the issuer to set aside money regularly in a reserve account in order to redeem bonds early. 3) Extraordinary redemptions occur in the case of extraordinary events like fires, hurricanes, or earthquakes. 4) A make whole redemption requires the issuer to repay not just the principal, but also the net present value of all future interest payments. Because this is expensive, issuers usually only include a make whole provision if they do not expect to redeem the bonds early.

Which of the following is needed in order to apply for DTC eligibility for a new issue of municipal bonds? -Completed application for a CUSIP number -Final official statement -Bid form -Preliminary official statement

Preliminary official statement An application for DTC eligibility requires submitting a copy of the preliminary official statement. At the time that the application must be submitted (within two business hours after the underwriter is formally awarded the offering) the final official statement will not have been created yet. The DTC does not assign CUSIP numbers. By the time the underwriter must submit the eligibility application, the issue usually will already have been assigned a CUSIP number.

In order for a 529 college savings plan to pass to a subsequent beneficiary with no tax consequences, the subsequent beneficiary must be: -Related to the contributor -Related to the original beneficiary -Under the age of 26 -Residing in the same state as the original beneficiary

Related to the original beneficiary Contributors can name subsequent beneficiaries if the original beneficiary does not need the money or is taken off the plan. In this case, the contributions will be rolled over to the subsequent beneficiary with no tax consequences, as long as the subsequent beneficiary is a qualified member of the beneficiary's family. Qualified family members include siblings, parents, in-laws, children, aunts and uncles, nieces and nephews, first cousins, step-siblings, step-parents, step-children, and spouses of any of these family members.

Rocky Mountain County decides to buy and refurbish a historic ski resort to stimulate the local economy. The project's annual revenue is expected to vary depending on the intensity of a given winter. The county's financial advisor recommends that the project's bond issue be term rather than serial. Why would he recommend this? -With term bonds, the county will owe less interest over the lifetime of the issue -Serial bonds require a sinking fund -Term bonds are more flexible with regard to early redemption -The financial advisor has made an error; term bonds are not appropriate for this type of project

Term bonds are more flexible with regard to early redemption -Term bonds are often advantageous for projects with unpredictable revenue. This is because term bonds are callable much more often than serial bonds. -A selling point of serial bonds is their predictable repayment structure, and thus they are much less likely to include a call feature. With term bonds, the county is more likely to have the option of calling some of the bonds when the project has a good year. -disadvantages of term bonds: 1) they generally require the issuer to make periodic payments into a sinking fund, in order to give investors confidence that the issuer will have the required funds when the principal comes due 2) unless conditions do allow the bonds to be called early, the issuer will pay more interest over the issue's lifetime than with serial bonds. This is because the shorter-term serial bonds are issued at lower rates, as well as being paid off periodically throughout the lifetime of the issue.

In regard to the composition of the Municipal Securities Rulemaking Board (MSRB), at least _____ and not less than _______ of the regulated representatives must be municipal advisors.

The Municipal Securities Rulemaking Board (MSRB) is composed of 21 members. Eleven members must be public representatives, while 10 must be regulated representatives. Of the regulated representatives, at least one must be a non-bank broker dealer, at least one must be a bank dealer, and at least one must be a municipal advisor representative. Additionally, not less than 30% of the regulated representatives in total must be municipal advisor representatives.

Which of the following best describes the effective date of a swap? -The date when the first settlement period begins -The first settlement date -The date on which the swap agreement is made -The date when interest begins to accrue

The date when interest begins to accrue For a swap, -The effective date is the date that interest payments begin to accrue, which is not always the same as the date on which the agreement between the municipality and the swap dealer is made or the date when the first settlement period begins. -The settlement date, or payment date, is the date that payments are due.

An investor is considering purchasing a private activity bond. The bond supports a private entity with no qualified public purpose. Which of the following is true? -The interest on the bond will be tax exempt and AMT exempt. -The interest on the bond will be tax exempt. -The interest on the bond will not be tax exempt. -The interest on the bond will be AMT exempt.

The interest on the bond will not be tax exempt. Private activity bonds (PABs) are municipally-issued securities in which at least 10% of the monies are used to support privately-owned or operated entities. As a result, these securities are not tax-exempt (regular or AMT tax). However, if at least 95% of the private activity bond is for a "qualified" private activity, such as an airport or a residential rental housing project or one of the defined "qualified" bond categories, and thus meets some public purpose, then interest on the bond may be excludable from the gross income calculation for federal income tax. Nevertheless, most qualified private activity bond interest is subject to the AMT.

A municipality is interested in establishing and growing a rainy day fund. The municipality is currently in good financial standing and does not anticipate needing to use the funds within the next 10 years. Which of the following investments would be the most appropriate for the municipality to invest in? - A stable NAV LGIP - A variable NAV LGIP - Treasury bills - A 529 plan

Variable NAV LGIP Variable NAV LGIPs attempt to maximize returns for their investors. This style of investing does not avoid market risk, and is better suited towards long-term investing. A stable NAV LGIP would be appropriate for shorter-term investing. A 529 plan is used by individuals to save for college tuition. Treasury bills are short-term investments with low interest rates, so they would not be the most appropriate for meeting a goal of long-term capital growth.

You are a municipal advisor professional (MAP). Two months ago, you made a contribution to an official candidate of an issuer. The candidate was not the incumbent, and did not win the election. Had he won, he would have been able to to direct advisory business to your firm. If the contribution was not subject to the de minimis exception will it trigger a ban on your firm doing municipal advisory business with this issuer? -No, because the official did not win the election -Yes, because the contribution was not subject to the de minimis exception and contributions to candidates can trigger the ban regardless of the election result -No, because only contributions to candidates who are incumbents can trigger the ban. -No, because the contribution was made two months ago and it was not subject to the de minimis exception

Yes, because the contribution was not subject to the de minimis exception and contributions to candidates can trigger the ban regardless of the election result Rule G-37 defines the term "official of an issuer" as "any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate. Since the contribution was not subject to the de mimimis exception it will trigger the ban.

Variable-rate demand obligations include: -a maintenance margin requirement -a call option -a put option -both a put option and a call option

a put option -Variable-rate demand obligations (VRDOs) contain a put option, which gives investors the right to put the security back to the issuer, at a price equal to the bond's face value plus accrued interest. -For example, assume that an investor has a VRDO with a face value of $1,000 and accrued interest of $30. The security will mature in a little under three months. Due to a pressing medical expense, the investor decides to return the VRDO to the issuer and receive the $1,030.

General obligation bonds: -are typically secured bonds, but are occasionally unsecured bonds -are typically unsecured bonds, but are occasionally secured bonds -are secured bonds -are unsecured bonds

are unsecured bonds General obligations are not funded by a revenue stream associated with a specific project, so they are unsecured. Instead, they are backed by the full faith and credit of the municipality and paid for by taxpayers.

As of 2018, municipal bonds that are ___________ no longer have any federal tax exemption. Issued as part of a current refunding Issued as part of an advance refunding For a public purpose Callable

issued as part of an advance refunding As of 2018, municipals have no federal tax exemption if they are refunding bonds (bonds issued to retire other bonds) issued as part of an advance refunding (a refunding in which the old bonds are not retired within 90 days). Refunding bonds issued as part of a current refunding (a refunding in which the old bonds are retired within 90 days) continue to enjoy whatever tax-exempt status they are otherwise entitled to.