Municipals- Series 7
With respect to municipal discretionary accounts, all of the following statements are true EXCEPT A) 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 B) a municipal securities principal must approve all transactions in the account promptly after execution C) all activity in the account must be reviewed at frequent intervals by a municipal securities principal D) 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
A Explanation As with all discretionary accounts, a principal must approve transactions promptly after execution and the account must be reviewed frequently by a principal. Because this is a discretionary account which allows municipal securities to be traded in it, these functions must be performed by a municipal securities principal. Without the customer's consent, the broker/dealer cannot effect transactions in the customer's account for municipal securities in which a control relationship exists between the broker/dealer and the issuer. To effect such transactions, the broker/dealer must make full disclosure of the relationship and obtain the customers consent, but termination of the relationship is not required. Reference: 6.4.3 in the License Exam Manual
For municipal bond transactions, data captured and made available to the market place is done by which of the following? A) Real Time Transaction Reporting System (RTRS). B) NYSE Super Display Book (SDBK). C) SEC. D) Nasdaq.
A Explanation MSRB Real Time Transaction Reporting System (RTRS) captures transaction data for municipal bonds and makes it available to the market place via numerous third-party vendors available to the public. Reference: 6.2.3 in the License Exam Manual
Which of the following municipal issues would least likely involve overlapping debt? A) An airport district. B) A school district. C) A library district. D) A park district.
A Explanation Overlapping debt refers to property tax districts (areas). Airport issues are usually revenue issues of an authority that has no property taxing powers. Reference: 6.1.2 in the License Exam Manual
Each of the following are generally used to service state GO bond issues EXCEPT: A) real estate taxes. B) income taxes. C) motor vehicle license fees. D) sales taxes.
A Explanation State-issued municipals are backed by state revenues, including sales and income taxes as well as fees for state issued licenses and permits. States do not normally levy property (real estate) taxes. Real estate taxes, known as ad valorem taxes, are typically levied by local municipalities such as cities and counties. Reference: 6.1.2 in the License Exam Manual
When Auction Rate Securities reset the yield to be paid in the upcoming period the process used: 1. is a stop loss system. 2. is a Dutch auction. 3. establishes a "clearing rate". 4. guarantees that every bidder will have their order filled. A) II and III. B) I and IV. C) II and IV. D) I and III.
A Explanation The process used to reset the interest rate each period for ARSs is called a Dutch auction which is the lowest bid rate at which all of the bonds can be reset, or sold for new issues, at par. This newly established rate is known as the "clearing rate" and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established "clearing rate" will have their orders go unfilled. Reference: 6.1.2 in the License Exam Manual
Which of the following statements regarding the flow of funds found within a municipal trust indenture are TRUE? It describes the disbursement of funds for revenue bond issues. It describes the disbursement of funds for general obligation issues. It is found within the official statement. It is found within the bond contract. A) I and IV. B) II and IV. C) I and III. D) II and III.
A Explanation The term "flow of funds" relates to revenue bond offerings only and describes the priority of disbursing revenues from the project. Generally, the revenues are deposited into a general collection account for disbursement into other accounts as specified in the trust indenture found in the bond contract. Reference: 6.3.2 in the License Exam Manual
A customer buys $10,000 worth of new issue municipal bonds at a price of 104 and the bonds have 10 years to maturity. Four years after purchasing the bonds, she sells them at 99. What is the tax loss on these bonds? A) 340. B) 400. C) 160. D) 500.
A Explanation To arrive at adjusted cost basis the premium on a new issue municipal bond must be amortized (subtract). To amortize the premium annually, divide the premium amount (in this case, $400 on the total purchase of 10 bonds) by the number of years until maturity (10). Thus, the customer writes down the initial cost by $40 per year. After 4 years, the bonds purchased at a cost of $10,400 will be written down to $10,240 (4 years $40 per year = $160). If the bonds are sold for $9,900, the tax loss is $340 ($10,240 − $9,900 = $340). Reference: 6.7.1 in the License Exam Manual
A municipal issuer publishes an official notice of sale to indicate that the offering will be made: A) none of these. B) on a competitive basis. C) on a negotiated basis. D) through a private placement.
B Explanation An official notice of sale is the issuer's method of inviting competitive bids on a new issue. It sets forth all of the information about the issue that a dealer would need in order to make a bid, including the size of the offering, the maturity dates, and the date, time, and place of the sale. Reference: 6.2.2 in the License Exam Manual
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 5-year call at a premium. B) Yield to the 30-year maturity. C) Yield to the 20-year call at par. D) Yield to the 10-year put at par.
B Explanation 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. Reference: 6.4.5 in the License Exam Manual
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 Explanation Debt service coverage ratio, feasibility studies, and projected operating revenues are important to the analysis of a municipal revenue bond. The public's attitude toward debt is relevant in evaluating GO bonds, which are backed by the taxing authority of the issuer. Reference: 6.3.2 in the License Exam Manual
Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid? A) 7% coupon with no premiums over par. B) 6% coupon with premiums over par. C) 6% coupon with no premiums over par. D) 8% coupon with premiums over par.
B Explanation In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds. Reference: 6.2.2 in the License Exam Manual
A customer purchases a municipal bond in the secondary market with a settlement date of August 1. If the next interest payment is September 1, which of the following statements regarding interest on this bond are TRUE? I The bond pays interest on March 1 and September 1 each year. II The seller must pay accrued interest no later than settlement day. III Accrued interest on this bond is computed using actual days elapsed. IV On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31. A) I and III B) I and IV C) II and IV D) II and III
B Explanation Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every 6 months. On settlement day, August 1, the buyer will pay the seller 5 months accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive payment for the full semiannual interest directly from the issuer. Reference: 6.7.2 in the License Exam Manual
Which of the following statements about municipal original issue premium bonds are TRUE? The original issue premium must be amortized. If the bond is held to maturity, there will be no capital loss reportable. The cost basis of the bond is adjusted downward by the amortized amount. A) I and III. B) I, II and III. C) II only. D) I and II.
B Explanation Original issue premium municipal bonds (as well as those purchased in the secondary market) must be amortized by an amount each year so that, if held to maturity, there is no reported capital loss. Reference: 6.7.1 in the License Exam Manual
Which of the following would be considered in analyzing the credit worthiness of a revenue bond issuer? Per capita debt. Debt service coverage. Management. Debt to assessed valuation. A) I and II. B) II and III. C) III and IV. D) I and IV.
B Explanation Revenue bonds are paid out of revenues from a particular project or facility, not from tax revenue. Therefore, debt service coverage and the personnel in charge of managing the facility are important. Overall debt of the issuer would be important in analyzing a general obligation bond backed by the issuer's full faith and credit. Reference: 6.3.3 in the License Exam Manual
A customer buys 5 municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has a: A) $100 capital loss. B) $50 capital gain. C) $100 capital gain. D) $50 capital loss.
B Explanation The premium on the municipal bonds must be amortized. The bonds were bought at 104 and therefore each bond has $40 in premiums (5 bonds X $40 = $200 premium to be amortized over 20 years). This means the cost basis of the bonds ($5,200) decreases by $10 a year ($200 / 20 years = $10). After 10 years amortization, $100 has been amortized (10 years × $10 per year), and the customer has an adjusted cost basis of $5,100. If the bonds are sold for 103 ($5,150), the customer has a $50 taxable capital gain. Reference: 6.7.1 in the License Exam Manual
The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is the: A) scale. B) spread. C) selling concession. D) discount.
B Explanation The spread, or underwriter's compensation, on a competitive bid underwriting is the difference between the bid to the issuer and the dollar price at which the underwriter reoffers the bonds to the public. Reference: 6.2.6 in the License Exam Manual
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) 0.06264 C) 0.1208 D) 0.125
B Explanation When comparing the yield of a taxable corporate bond to a tax-free municipal bond, use the formula: interest on corporate bond × (100% − tax bracket). In this case, 8.7% × .72 = 6.264%. Remember to use the yield to maturity, not the coupon rate. The bond is currently priced to yield 8.7%. In this case, a tax-exempt bond yielding more than 6.264% will provide a higher after-tax return. Reference: 6.4.8 in the License Exam Manual
A legal opinion evaluates which of the following features of a municipal issue? I Marketability. II Legality. III Tax-exempt status. IV Economic feasibility. A) I and III. B) I and IV. C) II and III. D) II and IV.
C Explanation A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants. Reference: 6.1.3 in the License Exam Manual
Interest received on a California general obligation bond purchased by a San Francisco resident is exempt from: A) federal income tax only. B) state income tax only. C) state and federal income taxes. D) capital gains taxes only.
C Explanation A municipal bond is generally exempt from federal and state income taxes in the state in which it was issued. The exemption, or lack thereof, applies to interest, not capital gains. Reference: 6.4.8 in the License Exam Manual
An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following EXCEPT A) the holder of a COP could foreclose on the asset generating the revenue in the case of default B) they are a form of municipal revenue bond C) they would require voter approval before a municipality could issue them 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
C Explanation 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. Reference: 6.1.2 in the License Exam Manual
A registered representative with discretionary authority requires customer authorization before purchasing: A) noninvestmentgrade bonds. B) junk bond funds. C) noncallable zerocoupon bonds. D) municipal bonds where a control relationship exists.
C Explanation Even though the representative has discretionary authority to trade the account, the MSRB requires that the representative receive customer permission prior to purchasing bonds where the firm has a control relationship with the issuer. Reference: 6.4.3 in the License Exam Manual
Which of the following does the MSRB require on customer confirmations? A) The current credit rating of the issuer B) The source of the bond if the broker-dealer did not have an inventory of the bond. C) Amount of markdown or markup on a principal transaction. D) The bonds current yield.
C Explanation MSRB rules require that customer confirmations provide the name, address, and telephone number of the broker/dealer and the capacity of the firm in the trade (agent or principal). Amount of commission is required if the firm acted as agent, and the markup or markdown if the firm acted as principal. Reference: 6.4.5 in the License Exam Manual
A customer buys a municipal bond regular way on Tuesday, December 23. The transaction will settle on the following A) Tuesday B) Thursday C) Friday D) Monday
C Explanation Municipal bonds, like corporate bonds, settle 2 business days after the trade date. December 25 (Christmas) is not a business day. Reference: 6.5.1 in the License Exam Manual
Which of the following responsibilities did the MSRB receive through the Securities Acts Amendments of 1975? 1. Regulation of municipal issuers. 2. Establishment of recordkeeping requirements for municipal broker/dealers. 3.Enforcement of any municipal regulations it adopts. 4. Creation of regulations for participants in the municipal securities secondary market. A) I and III. B) II and III. C) II and IV. D) I and IV.
C Explanation The MSRB creates rules for municipal trading and issues interpretations of its rules. It does not regulate issuers or have any enforcement capability. For broker/dealers, MSRB rules are enforced by FINRA. Reference: 6.5.1 in the License Exam Manual
Paying a premium of $10 per bond, Ms. Tracey Pringle bought 10 municipal bonds with 20 years to maturity. Ten years later, she sold the bonds for 103. For tax purposes, she has a: A) $200 gain. B) $300 loss. C) $250 gain. D) $200 loss.
C Explanation The cost per bond is $1,010. The amortization amount each year is 10/20 years, which equals $.50 per year. $.50 per year × 10 years = $5 per bond. After 10 years, the adjusted cost basis is $1,005 per bond. She sells the bonds for $1,030 per bond. $1,030 − $1,005 = $25 per bond 25 × 10 = $250 gain. Reference: 6.7.1 in the License Exam Manual
Which of the following would have the least impact in marketing a municipal bond issue? A) The maturity of the issue. B) The size of the block offered. C) The dated date of the issue. D) The rating of the issue.
C Explanation The dated date of a bond issue is merely the date on which the issue begins to accrue interest. As such it would have less to do with the marketing efforts related to a new issue than would items such as the size of the block offered, the rating of the issue (how financially strong it is), and the maturity. Reference: 6.2.8 in the License Exam Manual
Who attests to the legality of a bond issue and issues a legal opinion on a proposed new municipal bond issue? A) Syndicate manager. B) State Administrator. C) Bond counsel. D) Case attorney.
C Explanation The issuer hires a firm or an individual to act on its behalf as bond counsel. Reference: 6.1.3 in the License Exam Manual
The doctrine of reciprocal immunity most accurately describes: A) the prohibition of a broker/dealer from soliciting transactions in municipal securities for the account of an investment company in return for sales by the broker/dealer, of shares or units in the investment company. B) avoiding criminal prosecution in states outside the jurisdiction in which an illegal trade was made. C) the view that neither the states nor the federal government may tax income received from securities issued by the other. D) the exemption regarding securities-related crimes committed outside the U.S. by non-U.S. citizens.
C Explanation The principle that neither the states nor the federal government may tax income received from securities issued by the other is known as the doctrine of reciprocal immunity. States may, however, tax the interest on debt securities of other states. This doctrine provides the original basis for the federal income tax exemption on interest paid on municipal debt securities. Reference: 6.1.1 in the License Exam Manual
Your manager notifies you that a new municipal revenue bond issue you have been working on has been oversubscribed. How is the order acceptance priority for this issue determined? A) On a first-come, first-served basis. B) As outlined in the legal opinion. C) As outlined in the agreement among underwriters. D) As outlined in the indenture.
C Explanation The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate once the bid is won. This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement. Reference: 6.2.4 in the License Exam Manua
All of the following statements regarding municipal advertising are true EXCEPT: A) copies must be kept for 4 years. B) it must be approved by a principal. C) it must not be misleading. D) copies must be sent to the MSRB.
D Explanation All municipal advertising must be approved in writing by an appropriate principal before the first use and kept on file for 4 years. It need not be filed with the MSRB because the MSRB has no enforcement authority. Reference: 6.4.6 in the License Exam Manual
If a broker/dealer is acting as a financial advisor to a municipality, which of the following statements is TRUE? 1. MSRB rules prohibit the broker/dealer from acting as an underwriter for the issuer unless they meet the criteria of specific allowable exceptions. 2. The broker/dealer can act as both financial advisor and underwriter with no limitations. 3.The broker/dealer may only act in an underwriting capacity if the underwriting agreement was done as a negotiated underwriting. 4.There are some underwriting functions that the broker/dealer in their advisory capacity may be allowed to participate in such as assisting with the preparation of the official statement. A) II and III. B) I and III. C) II and IV. D) I and IV.
D Explanation If a broker/dealer has a formal advisory relationship with an issuer it may not generally act as underwriter for the issuers bonds. This applies regardless of whether the underwriting is a negotiated or competitive bid underwriting. There are exceptions, and some functions associated with underwriting that the MSRB rules do allow, but in those instances the broker/dealer could only be compensated for their advisory services and not be compensated for any underwriting services or related functions. Reference: 6.4.7 in the License Exam Manual
Which of the following is NOT under governance of the MSRB? I Issuers of municipal fund securities. II Broker/dealers that sell municipal fund securities. III Issuers of municipal bonds. IV Banks that sell municipal securities. A) II and III. B) I and II. C) II and IV. D) I and III.
D Explanation Issuers of municipal or municipal fund securities are exempt issuers and are not regulated or under the guidance of the MSRB or any other SRO. Reference: 6.5.1 in the License Exam Manual Question
Alternative minimum tax (AMT): A) is assessed against all self-employed individuals. B) is assessed against high annual income earners and gives them special deductions to take that lower income earners do not get. C) is assessed against low annual income earners and allows special deductions for them to be taken. D) is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income.
D Explanation The alternative minimum tax (AMT) is assessed against high annual income earners. When calculating adjusted gross income some deductions and exemptions are disallowed resulting in a higher taxable adjusted gross income (AGI). Reference: 6.1.2 in the License Exam Manual
The call provisions of a municipal issue would be detailed most completely in the: A) official notice of sale. B) legal opinion. C) "Bond Buyer". D) bond resolution.
D Explanation The bond resolution is the document that authorizes the issuance of a municipal bond. The resolution also describes the proposed issue's features and the issuer's responsibilities to its bondholders. Reference: 6.1.2 in the License Exam Manual
When a registered representative recommends a municipal bond purchase to a customer, which of the following would be of LEAST consideration regarding suitability? A) Bond's rating. B) Customer's state of residence. C) Customer's tax bracket. D) The intended use of funds raised by the issue.
D Explanation The customer's state of residence and tax bracket are important because these factors help establish the tax benefits offered by the municipal bond. The bond's rating is important in evaluating the credit risk assumed by the investor. While the intended use of the funds may be of interest to the customer it would be of little consideration when making a purchase recommendation. Reference: 6.4.3 in the License Exam Manual
Allocation order ?
Pro -->Presale Golfers -->Group Dont -->Designated Miss-->Member
