Municipal Debt

BABs are: I subject to Federal income tax II exempt from Federal income tax III issued in the taxable bond market IV issued in the tax-exempt bond market A. I and III B. I and IV C. II and III D. II and IV

A. "BABs" are Build America Bonds. Build America Bonds were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the debt market for needed capital projects.

A municipal bond which is secured by taxes OTHER than ad valorem taxes is a(n): A. Special tax bond B. Industrial revenue bond C. Moral obligation bond D. General obligation bond

A. A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond.

A "qualified" legal opinion on a revenue bond is one which: A. states that the pledged revenues are subject to prior liens B. is given by a qualified bond counsel C. states that no liens have been found against pledged revenues D. states that the bond counsel is qualified in the state to render an opinion

A. A qualified legal opinion is one where the bond counsel has found a legal or tax "problem," and the counsel details the "qualification" in the opinion. For a revenue bond issue, a reason for a qualified opinion is that the bond counsel has found other legal claims (liens) on the revenues that have been pledged to the bondholders.

All of the following statements are true regarding Construction Loan Notes ("CLNs") EXCEPT: A. When the facility is completed, the permanent financing is added to the outstanding balance ("basis") of the CLNs B. Accrued interest on CLNs is computed on an actual day month / actual day year basis C. The maturity of CLNs is generally 2 to 3 years D. The use of CLNs allows the municipal issuer to reduce its interest cost when constructing a new facility

A. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing). CLNs allow an issuer to reduce its interest cost, since the interest rate that must be paid on short term notes is lower than that for long term bond issues. CLNs typically have a maturity of 2 to 3 years, to coincide with the projected construction period of the building. Accrued interest on all municipal short term notes is computed in a manner similar to other money market instruments - an actual day month / actual day year basis. Please note that this is not true for long term municipal bonds, which accrue interest on a 30 day month / 360 day year. The first statement is false. When the long term financing is completed, the proceeds are used to retire the CLNs. The proceeds of the long term bond issue are not added to the original debt outstanding.

Industrial development bonds: I are backed by rental revenues paid by the corporate lessee II are backed by the municipality's ad valorem taxes III take on the credit rating of the corporate lessee IV take on the credit rating of the municipal lessor A. I and III B. I and IV C. II and III D. II and IV

A. Industrial development bonds are backed by the rental revenues paid by the corporate lessee as well as by the guarantee of the corporate lessee. These bonds, therefore, take on the credit rating of the corporation leasing the facility.

Which of the following municipal issues is a short term note that is retired by a later permanent bond sale? A. BAN B. RAN C. TAN D. TRAN

A. Municipalities issue BANs (Bond Anticipation Notes) to "pull forward" funds that will be collected from a later permanent bond sale. For example, a municipality expects to float a 20 year bond issue in 6 months. It can get the funds today by issuing 6 month BANs now. When the bond issue is floated, the proceeds are used to pay off the BANs. Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue. RANs (Revenue Anticipation Notes) are issued to "pull forward" revenues that are expected to be received by the municipality in the coming months. For example, the City of New York will receive a $200,000,000 payment from the Federal government on July 1st to support mass transit. It is now April 1st. The city can issue 3-month RANs and borrow against the upcoming revenue to be received from the Federal Government. A TRAN is a combination Tax and Revenue Anticipation Note.

A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell: I General obligation bonds II Revenue bonds III Industrial revenue bonds A. I only B. I and II only C. II and III only D. I, II, III

A. Voter approval is needed for a municipality to sell general obligation bonds (non-self supporting debt) in an amount that exceeds the municipality's constitutional limit. Revenue bonds and industrial revenue bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections.

Which statement is TRUE about a Certificate of Participation (COP)? A. COPs are subject to statutory debt limits B. COPs are backed by a pledge of lease revenues C. COPs have a higher credit rating than G.O. bonds of the same issuer D. COPs are full faith and credit obligations of the issuer

B. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states. A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.

Which statements are TRUE regarding the legal opinion of a new municipal bond issue? I All new municipal bonds have a legal opinion II Only new issue municipal revenue bonds have a legal opinion III Municipal issuers desire a qualified opinion IV Municipal issuers desire an unqualified opinion A. I and III B. I and IV C. II and III D. II and IV

B. All new municipal issues have a legal opinion printed on the bond. The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he examines municipal statutes, state laws, judicial edicts, and tax regulations. An unqualified opinion is required, meaning the bond counsel is satisfied that the issue is valid, legal, binding and federally tax exempt. If the bond counsel has any problems with the issue, then the opinion would be qualified by the bond counsel. New municipal issues with qualified legal opinions are virtually unmarketable.

All of the following statements are true about "Build America Bonds" EXCEPT: A. the issuer gets a federal tax credit equal to 35% of the stated interest rate on the issue B. the interest is federally tax exempt C. the bonds give municipal issuers access to the conventional corporate debt market D. the proceeds of the bond issues can only be used for infrastructure improvements

B. Build America Bonds (BABs) were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the broader corporate debt market (which includes international investors who do not participate in the municipal market) for needed capital projects.

All of the following are sources of income available for general obligation bond debt service EXCEPT: A. ad valorem taxes B. highway tolls C. license fees D. assessments

B. General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Ad valorem taxes, fines collected for paying taxes late, assessments of additional taxes, as well as fees collected that are not a specified income source for revenue bonds, are all sources of income backing G.O. issues. Highway tolls are pledged to pay the debt service on revenue bonds that are sold to finance the construction of the road. These monies are not available to pay the debt service on G.O. bond issues.

The manager of a pension plan would invest in all of the following debt securities EXCEPT: A. Corporate bonds B. Municipal bonds C. U.S. government bonds D. Foreign government bonds

B. Income from securities held in Pension Plans is tax deferred; so there is no benefit to investing in municipals, which have lower rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds (both U.S. government obligations and foreign government obligations, such as Canadian government bonds), both of which have higher interest rates because their interest income is taxable by the Federal government.

From an issuer's standpoint, as the years progress, "level debt service" serial bond issues have: I Decreasing interest payment amounts II Increasing interest payment amounts III Decreasing principal repayment amounts IV Increasing principal repayment amounts A. I and III B. I and IV C. II and III D. II and IV

B. Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue (similar to a mortgage amortization schedule). Since bonds are retired annually, the amount of the payment representing interest declines annually. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases.

Ultimate payment of debt service on moral obligation bonds is dependent upon: A. Earnings coverage B. Legislative apportionment C. Judicial edict D. Court validation

B. Moral obligation bonds are political subdivision (such as a city) issues that obligate the city to pay debt service but additionally, are backed by the State's "moral" obligation to pay. If the city cannot pay, these moral obligation bonds are paid only if the State legislature apportions the funds to service the debt. There is a moral obligation on the part of the State to pay; but not a legal obligation to pay.

Short sale transactions are typical for all of the following EXCEPT: A. Treasury bonds B. Municipal bonds C. Common stock D. Listed options

B. Municipal bonds are generally not sold short because the trading market in each maturity is very thin, making short covering difficult, if not impossible.

Municipal variable rate demand notes: I have a minimum value which will never go below par II have a maximum value which will never go above par III are subject to market risk IV are not subject to market risk A. I and III B. I and IV C. II and III D. II and IV

B. Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk. However, if interest rates fall, the price can go above par (by a small amount) until the next reset date.

To smooth out tax collections, a municipality will issue a: A. BAN B. TAN C. RAN D. TRAN

B. Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue. RANs (Revenue Anticipation Notes) are issued to "pull forward" revenues that are expected to be received by the municipality in the coming months. For example, the City of New York will receive a $200,000,000 payment from the Federal government on July 1st to support mass transit. It is now April 1st. The city can issue 3-month RANs and borrow against the upcoming revenue to be received from the Federal Government. A TRAN is a combination Tax and Revenue Anticipation Note. A BAN is a Bond Anticipation Note - a short term note that will be retired by a later long term bond sale.

New issues of short term municipal notes and bonds are available in which forms? I Bearer II Book Entry III Registered to Principal and Interest A. I only B. II only C. III only D. I, II, III

B. New issues of municipal notes are available only in "book entry" form. The same is true for new issues of municipal bonds.

Which of the following projects would be financed by a general obligation bond issue? A. The construction of a new subway line B. The construction of a new junior high school C. The construction of a new hydroelectric generating plant D. The construction of a new sewage treatment plant

B. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.

Which of the following terms describe a special tax bond issue? A. Self supporting B. Non-self supporting C. General obligation D. Moral obligation

B. Special tax bonds are backed by taxes other than an ad valorem tax, such as liquor taxes, gasoline taxes, cigarette taxes or sales taxes. They are considered to be a non-self supporting debt since they are paid from tax collections. Self supporting debts are revenue bond issues that pay their own way from collected revenues. When ratings agencies such as Standard and Poor's look at the Debt Statement of a municipality to assign a credit rating, they will not deduct special tax bonds from Total Bonded Debt when calculating Net Direct Debt (All Bonded Debt Sold - Self Supporting Debt). They say that they treat Special Tax bonds as non-self supporting debt because, to be conservative, they consider ALL types of taxes paid by the population of a town when calculating Net Bonded Debt.

Interest income from municipal bonds is: A. exempt from Federal, State and Local tax B. exempt from Federal tax and subject to State and Local tax C. subject to Federal tax and exempt from State and Local tax D. subject to Federal, State and Local tax

B. The interest income from municipal bonds is exempt from Federal income tax; but is subject to State and Local tax. However, if a bond is purchased by a State resident, then the State exempts that issue from taxation as well.

If a regular way municipal bond trade takes place on Monday, June 2nd, the trade will settle on: A. Tuesday June 3rd B. Wednesday June 4th C. Thursday June 5th D. Friday June 6th

B. Trades of municipal securities settle "regular way" 2 business days after trade date.

The principal advantage of purchasing a variable rate municipal note is: A. The interest rate can be expected to remain fairly stable B. The market value can be expected to remain fairly stable C. The marketability risk can be expected to be lower D. The credit risk can be expected to be lower

B. With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes will fluctuate up or down, depending upon market interest rates. Thus, the note always gives a yield that approximates current interest rate levels so the market price of these securities will remain fairly constant. These notes avoid "interest rate risk," also known as market risk, since a rise in interest rates will not devalue these securities. However, they still may have marketability risk (the risk that the securities cannot be easily sold); and can have credit risk.

Significant investment features for the purchaser of municipal bonds include all of the following EXCEPT: A. interest is currently federal tax exempt B. maturities and issues may be diversified C. interest is currently state and local tax exempt D. insured issues are available for customers wishing minimum credit risk

C. Interest income derived from municipal bonds is currently exempt from federal income tax; however it is subject to state and local tax unless the state exempts the issue from taxation. Most states allow this only for issues that are purchased by residents of that state.

A "double barreled" municipal issue has: I primary backing of a general obligation pledge II primary backing of a revenue pledge III secondary backing of a general obligation pledge IV secondary backing of a revenue pledge A. I and III B. I and IV C. II and III D. II and IV

C. A "double barreled" bond is a municipal revenue bond whose principal and interest payments are backed by a revenue pledge; however, if the revenues are insufficient to cover the debt service requirements, the municipality will use its ad valorem taxing power to meet the deficit.

Which of the following are sources of income that can be used for debt service on municipal revenue bonds? I User Fees II Special Taxes III Lease Rentals IV Capitalized Interest A. I and III only B. II and IV only C. I, II, III D. I, III, IV

C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.

The income source backing a special tax bond issue could be: I Cigarette taxes II Sales taxes III Ad valorem taxes IV Business taxes A. I only B. II only C. I, II, IV D. I, II, III, IV

C. Ad valorem taxes do not back special tax bond issues. Ad valorem taxes back general obligation bonds. The definition of a special tax bond is one which is not backed by ad valorem taxes, but rather by another tax source (such as excise, sales, business or income taxes).

Which statements are TRUE about a Certificate of Participation (COP)? I COPs are considered to be a general obligation of the issuer II COPs are considered to be backed by a revenue pledge III Payments to security holders are contingent on the governing body making an annual appropriation from budgeted funds IV Payments to security holders are not contingent on the governing body making an annual appropriation from budgeted funds A. I and III B. I and IV C. II and III D. II and IV

C. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states. A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.

Construction Loan Notes are repaid from: A. rents received from the housing project built with the proceeds of the offering B. rent subsidies received from the U.S. Government C. monies received from a permanent take-out financing D. monies received from the issuance of the Construction Loan Note

C. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing).

Which of the following statements are TRUE regarding debt obligations? I Corporations issue revenue bonds II Municipalities issue revenue bonds III Corporations issue income bonds IV Municipalities issue income bonds A. I and III B. I and IV C. II and III D. II and IV

C. Corporations issue income bonds (also known as adjustment bonds) in times of corporate distress. These bonds obligate the issuer to pay only if the issuer has sufficient income. Municipalities issue revenue bonds, which pledge the revenues from a facility (such as a bridge or tunnel) to pay for the debt service on the bond issue.

If a municipality is expecting to receive federal funding for mass-transit programs, it could borrow against the expected funds to be received by issuing: A. BANs B. TANs C. GANs D. CLNs

C. GAN stands for "Grant Anticipation Note." A GAN can be issued by a municipality to "pull forward" and get immediate use of federal grant monies that are expected to be received in the upcoming months. These federal grant monies are used for mass transit, energy conservation and pollution control improvements.

All of the following are true statements regarding revenue bonds EXCEPT: A. issuance of the bonds is dependent on earnings requirements B. the bonds may be double barreled with backing by ad valorem taxes C. revenue bonds are only suitable for investors willing to assume a high level of risk D. yields for revenue bond issues are generally higher than yields for comparable G.O. issues

C. In order to issue revenue bonds, a feasibility study must be prepared and it must show adequate net revenues ("earnings") to service the debt before the bonds can be floated. A revenue bond can be double barreled to improve its safety by additionally backing the issue with the ad valorem taxing power of the issuer. Yields on revenue bonds are higher than that of comparable G.O. bonds because of generally higher risk. Revenue bonds are suitable for investors willing to take on low, medium or high risk. To evaluate credit risk on these issues, look at Moody's or Standard and Poor's ratings.

Municipal bond traders execute transactions: I on the floor of recognized exchanges II with bank dealers in the over-the-counter market III with brokerage wire houses in the over-the-counter market IV with municipal broker's brokers A. I only B. IV only C. II, III, IV D. I, II, III, IV

C. Municipal bonds are traded in the over-the-counter market. They are not traded on national stock exchanges. Remember, there is no national trading market in municipals - a requirement for listing - so municipal markets are generally confined to the state of issuance. Bonds can be traded in the OTC market with bank dealers, other brokers, as well as with municipal broker's brokers. These are wholesale firms (of which only 12 exist in the U.S.) that only trade with retail municipal brokers. These firms do not take inventory positions. They act as an agent, usually helping the retail firm with large institutional trades.

Municipalities would issue tax exempt commercial paper for which of the following reasons? I To smooth out collections of funds that are normally subject to seasonal fluctuations II To meet a temporary cash shortage due to unforeseen extraordinary expenses III To refund an outstanding bond issue IV To provide construction period financing that will be permanently financed by a future bond sale A. I only B. III only C. I, II, IV D. I, II, III, IV

C. Municipal commercial paper is not very popular. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short-term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a CLN - construction loan note). Commercial paper cannot be used for long term financing such as a bond refunding. Remember, commercial paper is a short term promissory obligation - not long term.

Constitutional debt limits are imposed on the issuance of: A. revenue bonds B. moral obligation bonds C. general obligation bonds D. industrial development bonds

C. Municipalities impose debt ceilings on the dollar amount of bonds that can be issued backed by ad valorem taxing power (G.O. bonds). To raise this limit requires a public referendum. Debt limits do not apply to self supporting debt such as revenue bonds or industrial revenue bonds. They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).

A municipality has a tax rate of 12 mills. A piece of real property in the municipality is assessed at $225,000 and has a fair market value of $250,000. The annual tax liability on the property is: A. $120 B. $300 C. $2,700 D. $3,000

C. One mill = .001; 12 mills = .012. Taxes are based on assessed valuation, not fair market value. .012 x $225,000 = $2,700. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.

Which of the following projects would be financed by a revenue bond issue? I The construction of a new subway line II The construction of a new junior high school III The construction of a new hydroelectric generating plant IV The construction of a new sewage treatment plant A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

C. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.

The municipal bond counsel opines on all of the following EXCEPT: A. validity B. legality C. feasibility D. tax exempt status

C. The bond counsel examines new municipal issues for legal or tax problems and renders an opinion on the validity, legality and tax exempt status of the issue. Bond counsels do not render economic opinions, which is the same as rendering an opinion on feasibility of an issue.

Which of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds? I Expected demand for the facility II Effect of competing facilities III Expected operating costs of the facility IV Bond trust indenture A. I and III only B. III and IV C. I, II, III D. I, II, IV

C. The feasibility study performed prior to the issuance of revenue bonds is an economic study that projects revenues and costs for the facility to determine if there will be sufficient net revenues to service the debt. The effect of any competing facilities is included in the study. Legal aspects, such as the trust indenture, are not included in the feasibility study. These are evaluated by the bond counsel.

An obligation that has an interest rate that floats and that is reset on a daily or weekly basis, and that gives the holder the right to sell the obligation back to the issuer at the reset date, or at the final maturity date, is known as a(n): A. perpetuity B. collateralized debt obligation C. variable rate demand obligation D. exchange traded put option

C. The question describes a municipal VRDO - a variable rate demand obligation. It is a way for a municipality to issue what is a long-term security at short-term (lower) interest rates. The interest rate is reset periodically (usually daily) and the holder can put the bond back to the issuer at each reset date. These typically have a final maturity date 10 years after issuance, where they ultimately will be repaid.

What is considered to be the most positive factor when evaluating the credit of a general obligation bond of a city? A. Increasing real property values B. Increasing income of residents C. Increasing tax base D. Increasing number of residents

C. All of these choices are positives for assigning a credit rating. General obligation bonds of towns are paid by tax collections, and the usual sources of taxes is real estate tax collections. However, towns can also impose taxes on other assets, such as business assets, automobiles, boats, etc. The total of all taxable assets is the "tax base" of the town.

When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)? A. Both interest and principal payments are made semi-annually B. Interest is paid semi-annually and principal is paid at maturity C. Principal is paid semi-annually and interest is paid at maturity D. Both interest and principal are paid at maturity

D. A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal" amount) and the accreted interest income.

Revenue Anticipation Notes are a(n): I funded debt II unfunded debt III source of permanent financing IV source of temporary financing A. I and III B. I and IV C. II and III D. II and IV

D. A Revenue Anticipation Note (RAN) is issued by a municipality that wishes to borrow short-term against revenues that are expected to be received in the near future. Thus, this is a source of temporary financing and it is an unfunded (short term) debt.

The proceeds of a "Build America Bond" may be used for all of the following EXCEPT: A. public buildings B. transportation infrastructure C. water and sewer projects D. prerefunding outstanding issues

D. Build America Bonds (BABs) were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the debt market for needed capital projects. The proceeds of BABs cannot be used to prerefund existing issues (that does not create jobs).

A municipality has issued a general obligation bond. Which of the following are sources of income available for debt service? I Ad valorem taxes II License fees III Fines IV Assessments A. I and IV B. II and III C. I, III, IV D. I, II, III, IV

D. General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Ad valorem taxes, fines collected for paying taxes late, assessments of additional taxes, as well as fees collected that are not a specified income source for revenue bonds, are all sources of income backing G.O. issues.

Municipal bonds would be an appropriate investment for which of the following? I Individuals II Individual Retirement Accounts III Bank Holding Companies IV Casualty Companies A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV

D. It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments into the account.

A municipal bond which funds an improvement that benefits only a small portion of the community is a: A. general obligation bond B. double barreled bond C. moral obligation bond D. special assessment bond

D. Special assessment bonds are used to fund an improvement which benefits only a small portion of the community. For example: new street lights are installed in a specific area where only that area is assessed higher taxes to pay for the improvement.

In order to render an opinion on a new municipal bond issue, the bond counsel will examine: I Municipal statutes II State constitution and amendments III Tax code and interpretive regulations IV Judicial edicts A. I and II only B. III only C. II, III, IV D. I, II, III, IV

D. The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he examines municipal statutes, state laws, judicial edicts, and tax regulations.

All of the following would be found in a municipal bond resolution EXCEPT: A. the issuer's duties to the bondholders B. the nature of the obligation C. any restrictive covenants to which the issuer must adhere D. any costs to be paid by the issuer in connection with issuing the bonds

D. The bond resolution (or bond contract) is the contract between the issuer and the bondholder. It spells out the nature of the obligation; the issuer's duties to the bondholders; and any restrictive covenants to which the issuer must adhere. Any costs that the issuer incurs to sell the bonds has no bearing on the bond contract, since the bondholder is not involved in these expenses - they are solely the responsibility of the issuer.