Questions Chapter 4 Series 50
All of the following documents would be expected to accompany the syndicate letter, EXCEPT the: Bid sheet Legal opinion Notice of Sale Preliminary official statement
Legal opinion -The syndicate letter (signed by all members of the underwriting) would not contain the legal opinion. -The municipal bond attorney renders the legal opinion which is printed on the bond certificate itself, or is attached to the bond certificate under separate cover. -It is usually rendered after the issue is priced.
All of the following statements are TRUE regarding an official statement for a new issue of municipal securities, EXCEPT: a. Issuers do not have to make an official statement available b. If one is prepared, an official statement must be filed with the SEC prior to the offering c. An official statement provides purchasers of the new issue with detailed financial information about the issue d. If an official statement is prepared, MSRB rules require that it be made available customers at or prior to settlement date
b. If one is prepared, an official statement must be filed with the SEC prior to the offering Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933. They cannot be required to prepare an Official Statement by the SEC, MSRB, or any other regulatory body. If one is prepared, it does not have to be filed with any regulatory body. The issuer will usually provide an official statement because the underwriting syndicate wishes to provide information to prospective investors and thereby help market the issue. The official statement is submitted to and made available through EMMA. (66936)
Issuer A recently sold a $30,000,000 serial bond issue with a single interest rate. Which of the following statements best describes what will occur? a. Principal and interest payments increase with maturity b. Principal and interest payments decrease with maturity c. Interest payments increase as principal payments decrease with maturity d. Principal payments increase as interest payments decrease with maturity
principal payments increase as interest rates decrease with maturity -When an issuer sells a serial bond issue, a certain amount of bonds will usually mature each year. -Once a bond matures, interest payments stop on that maturity. Thus, a serial bond issue helps an issuer spread out the debt service to suit the issuer's budget. As each year passes, more bonds mature; thus, principal payments increase. Since bonds are maturing each year, less interest would be paid on the entire issue from year to year. Therefore, interest payments would decrease over the life of the entire issue.
under rule 15c2-12, who must provide certain information on an ongoing basis?
the UNDERWRITER will make sure the ISSUER will provide the information
The rate that discounts all future cash payments so that the sum of their present values equals the bond proceeds is the: Rate of return True interest cost Accretion rate Amortization rate
true interest rate also called the canadian Method takes into account the time value of money. To calculate TIC, start with NIC, then use present value tables to arrive at TIC. NIC does NOT take into account present value.
A municipality issues $100,000,000 of 7% bonds that will mature in 20 years with call protection of 10 years. The indenture states the annual amount of principal payments deposited in a sinking fund remains the same over the life of the issue of bonds. Nine years later, rates have declined to 5% and the issuer would like to issue a new bond to capture the lower rate. The issuer sells $60,000,000 of 5% refunding bonds maturing in 8 years with a same type of principal repayments. What will the annual cost savings be once the original bonds are refunded? $800,000 $1,500,000 $2,500,000 $3,000,000
$1,500,000 The table below reviews the total annual payments of each bond. The 20-year bonds will have $5,000,000 of annual principal payments ($100,000,000 / 20) and the 8-year bonds will have $7,500,000 of annual principal payments ($60,000,000 / 8). Annual interest on the refunding issue is $3,000,000 ($60,000,000 x 5%).
A municipality is offering a new issue of bonds through a group of underwriters at $1,000 par value. The manager's fee is 10 basis points. Selling syndicate members will receive 60 basis points and the selling concession is 30 basis points. The amount received by the municipality is: $993 per bond $990 per bond $989 per bond $1,000 per bond
$993 per bond bc issuer gets offering price ($1,000) minus the Underwriting spread ($7.00)
A municipality with outstanding bonds at a rate of 5.50% is considering an advance refunding issue that can be sold at 4.00%. As its municipal advisor, you could recommend all of the following choices, EXCEPT: -Sell the refunding issue at a premium -Invest the escrow account in government securities yielding 5.50% -Have the issuer contribute cash -Recommend that the principal amount of the refunding issue be greater than the amount of bonds currently outstanding
-Invest the escrow account in government securities yielding 5.50% Due to the Treasury arbitrage restrictions, the yield on the securities in the escrow account may not exceed the yield on the refunding issue.
Who determines what is considered to be an order from retail customers? Underwriter Issuer Financial Advisor Syndicate Manager
-The issuer is responsible for determining what is considered to be an order from retail customers. An underwriting agreement may include a retail order period which provides retail customers with the opportunity to purchase new municipal issues.
Under MSRB Rule G-17, the disclosures concerning an underwriter's role and conflicts of interest must be provided to: -The MSRB through the EMMA system -The official of the issuer who has been appointed by the governor -Any purchaser of a new issue of bonds being sold by the issuer in a negotiated underwriting -The official of the issuer who has the authority to bind the issuer by contract with the underwriter
-The official of the issuer who has the authority to bind the issuer by contract with the underwriter
On the EMMA , Primary market disclosure documents will generally be posted on the system within ____ minutes of acceptance
15 minutes
Which TWO of the following choices are subject to continuing disclosure requirements under SEC Rule 15c2-12? An issue of less than $900,000 A bank-qualified bond Bonds sold in denominations of $100,000 to a total of 30 investors Bonds sold in denominations of $100,000 and with a maturity of 12 months I and III I and IV II and III II and IV
A bank-qualified bond Bonds sold in denominations of $100,000 and with a maturity of 12 months SEC Rule 15c2-12 pertains to most primary offerings of municipal securities, with the following exceptions. -A primary offering of municipal securities with an aggregate principal amount of less than $1,000,000 -Bonds that are sold to investors in units of no less than $100,000 and are sold to no more than 35 sophisticated investors (private placement) -Bonds that are sold in $100,000 minimum denominations and mature in nine months or less Also exempt are offerings that are sold by an issuer directly to an investor without using an underwriter (a direct loan). There is no exemption for bank-qualified bonds.
break these up into who does what Which of the following activities would be the responsibility of bond counsel? Confirm the tax-exempt status of the issuer and review the Treasury arbitrage regulations Help prepare the rating agency strategies and presentations Review whether to use State and Local Government Series (SLGS) securities or other securities for purposes of investment of bond proceeds Determine the available resources for payment of principal and interest of new municipal debt
Bond counsel is a law firm retained by the issuer to prepare a legal opinion. This opinion states that the bonds have been validly issued and whether the bonds are tax-exempt. The bond counsel may also be responsible for other legal matters such as pending litigation that may jeopardize the validity of the bond issue, interpreting Treasury arbitrage regulations and tax law, and assisting in drafting the bond resolution, indenture, loan agreement or other bond financing documents. The municipal advisor and/or the senior syndicate manager would help prepare the rating agency strategies and presentations. The municipal advisor would review whether to use State and Local Government Series (SLGS) or other securities for purposes of investment of bond proceeds. The issuer would determine the available resources for payment of principal and interest of new municipal debt and pays these amounts when they become due.
A state government agency issues a bond benefiting a third party. The continuing disclosure requirements may be met by: a. Either the conduit borrower or the conduit issuer b. The conduit borrower only c. The conduit issuer only d. Someone other than the conduit borrower or the conduit issuer
Either the conduit borrower or the conduit issuer -SEC Rule 15c2-12 requires the dealer underwriting the bonds to make sure the issuer will provide certain information on an ongoing basis. This is accomplished through a written agreement created when bonds are issued, referred to as a continuing disclosure agreement between the issuer or other obligated persons and the underwriter. In the case where a state or local government issuer (the conduit issuer), issues bonds to benefit a third party (the conduit borrower), either the conduit borrower or the conduit issuer would make the continuing disclosure requirement. This would be specified in the continuing disclosure agreement.
When should each of these roles apply for a CUSIP Number for a new issue? -Financial Advisor -Underwriter Negotiated deal -Underwriter for Competitve ddeal
Financial Advisor -the application must be made no later than one business day after dissemination of a notice of sale. Underwriter of a negotiated sale -the application must be made no later than the time that pricing information for the issue is finalized Underwriter in a competitive sale -in which no CUSIP # has already been assigned, the application must be made immediately after receiving notification of the award by the issuer
A high to low refunding will result in which TWO of the following? I Investing the escrow account in securities that would exceed the rate on the bonds to be refunded II Investing the escrow account in securities that are lower than the rate on the bonds to be refunded III The principal amount of government securities required would be higher than the bonds being refunded IV The principal amount of government securities required would be lower than the bonds being refunded I and III I and IV II and III II and IV
II Investing the escrow account in securities that are lower than the rate on the bonds to be refunded III The principal amount of government securities required would be higher than the bonds being refunded
In the event of a default, the trustee must notify the bondholders: Immediately Within 30 days Within 60 days No later than the next interest payment date
Immediately Each issuer must appoint a trustee in which they have the interest for the BONDHOLDER, and uphold the trust indenture
In a competitive sale, the end of the presale period is when all bids for the purchase of securities must be submitted to the: Syndicate manager Public Issuer MSRB
Issuer In a competitive sale, the end of the presale period occurs when all bids for the purchase of securities must be submitted to the issuer.
A municipal agency issues a bond with a value of $100,000,000. The bond would be considered a private activity bond if how much of the proceeds were used by a private company? Less than $5,000,000 Less than $10,000,000 More than $10,000,000 More than $5,000,000
More than $10,000,000 A municipal bond would be defined as a private activity bond under the following two conditions. -If more than 10% of the proceeds of an issue will be used for a private business use and more than 10% of the principal or interest on the bond issue is made by or secured by payments or property used or to be used for a private business use, or -The amount of proceeds of the issue that is to be used to make or finance loans to persons other than governmental entities exceeds the lesser of 5% of such proceeds or $5,000,000. If the proceeds of the bond issue are $100,000,000 and the amount of the proceeds exceeds 10% or $10,000,000, the bond would be considered a private activity bond
New issue municipal bond information is required to be sent to: FINRA NIIDS SEC SHORT
NIIDS -According to MSRB Rule G-34, in order to act as an underwriter of municipal securities, a municipal securities dealer must register to use NIIDS (New Issue Information Dissemination Service). -NIIDS was developed by the Depository Trust Corporation (DTC) to distribute information received from underwriters to help dealers meet the requirements for prompt reporting on municipal bond trades. SHORT (Short-term Obligation Rate Transparency) is used to collect information on VRDOs and ARS.
In order to pay ongoing system maintenance on a wastewater system, a municipal agency would most likely use which of the following? Direct lending from a bank Pay-as-you-go funding Issue bonds An interest rate swap
Pay-as-you-go funding two types of expenditures—ongoing routine maintenance, and major system improvements and new construction. -Typically, routine, ongoing maintenance can be paid using pay-as-you-go funding, which is paid using the agency's regular collected fees or taxes.
Making an open-market purchase is a means for an issuer to: Refinance existing debt Redeem bonds prior to maturity Refund existing debt Defease existing bonds
Redeem bonds prior to maturity An open-market purchase is an early redemption feature where the issuer is redeeming its bonds by buying them on the open market.
The number of times a private activity bond may be refunded is: None One Three Unlimited
UNLIMITED TRICK QUESTION UGH SO ANNOYING -PAB bonds may be refunded an unlimited amount of times but, cannot be advance refunded
SEC Rule 15c2-12 requires which of the following to make sure continuing disclosure information will be provided? a. The dealer underwriting the bonds b. The financial advisor assisting the issuer c. The issuer of the bonds d. The bond counsel
Underwriter -SEC Rule 15c2-12 requires the dealer underwriting the bonds to make sure the issuer will provide certain information on an ongoing basis. -This is accomplished through a written agreement created when bonds are issued, referred to as a continuing disclosure agreement between the issuer or other obligated persons and the underwriter. -The issuer in effect is promising to provide certain annual financial information and material event notices to the public.
An underwriter may: a. Not recommend that the issuer not retain a municipal advisor b. Recommend that the issuer not retain a municipal advisor in a competitive underwriting c. Recommend that the issuer not retain a municipal advisor in a negotiated underwriting d. Recommend that the issuer use an underwriter that is affiliated with the municipal advisor
a. Not recommend that the issuer not retain a municipal advisor -An underwriter may not discourage an issuer from using a municipal advisor, or otherwise imply that the hiring of a municipal advisor would be redundant, because the underwriter can provide the same services that a municipal advisor would. -The type of underwriting would not be relevant, and recommending that the issuer use an underwriter that is affiliated with the municipal advisor would be a conflict of interest.
All of the following secondary market information may be found on the Electronic Municipal Market Access (EMMA) system, EXCEPT: a. Pricing information of municipal securities which are currently being offered by broker-dealers b. The price a municipal securities transaction was executed by a broker-dealer c. The most actively traded municipal securities d. The amount of the transaction that was executed by a broker-dealer
a. Pricing information of municipal securities which are currently being offered by broker-dealers
To calculate the net savings on a bond that was not rated with one that was rated, the formula is: a. Total interest cost of the nonrated bond − total interest cost of the rated bond less the cost of ratings b. Total interest cost of the nonrated bond − total interest cost of the rated bond plus the cost of ratings c. Total interest cost of the nonrated bond + total interest cost of the rated bond less the cost of ratings d. Total interest cost of the nonrated bond + total interest cost of the rated bond plus the cost of ratings
a. Total interest cost of the nonrated bond − total interest cost of the rated bond less the cost of ratings -The analysis would be done by taking the total interest cost on a recently sold nonrated bond and subtracting the total interest costs on the similarly issued rated bond to calculate the total savings due to the rating. -Next, subtract the cost of the rating(s) to calculate the net savings, assuming the bond was rated.
An issuer that will not be able to provide the annual financial information by the date specified in the continuing disclosure agreement: a. Would trigger a failure to file notice to be filed with the MSRB by that specified date b. Would trigger a failure to file notice to be filed with the MSRB within 10 business days c. Would not trigger any filing requirement d. Would trigger the filing of a press release
a. Would trigger a failure to file notice to be filed with the MSRB by that specified date
Your client calls and asks you to explain the meaning of The Bond Buyer's visible supply. Which of the following responses is TRUE? I. It is compiled each day II. It is composed of all competitive sealed bids invited III. It is composed of all negotiated proposed bond issues IV. It does not include short-term notes a. I only b. I and II only c. II and III only d. I, II, III, and IV
all -The visible supply is all municipal bonds that are expected to be brought to market in the next 30 days. -It is computed daily and includes all competitive and negotiated offerings that are anticipated to be brought to market. -However, it does not include short-term notes.
Which of the following is NOT an information source for municipal bonds in the primary market? EMMA The Wall Street Journal Alternative trading systems New-issue wires
alternative trading systems that would be for the secondary market, not primary -Information sources for municipal bonds in the primary market include the following: the Notice of Sale, an official statement, issuers or financial advisors, the Electronic Municipal Market Access (EMMA) system, print or electronic news services (The Wall Street Journal), and new-issue wires.
A municipal bond is trading at a premium and is callable. What call is used to calculate the dollar price of the bond? a. The sinking fund call b. An in-whole call c. A catastrophe call d. A partial call
b. An in-whole call -An in-whole call - entire issue is callable on the first call date. -The yield to call must be disclosed to the customer if the calculation amounts to less than the yield to maturity. -Most municipal bond confirmations will have both yields.
Which of the following choices BEST describes a placement agent in a private offering? A. A firm that assists an issuer by agreeing to purchase its securities at a fixed price in order to resell the securities to investors b. A firm that assists an issuer by finding institutional investors to purchase its securities c. A firm that assists an issuer by finding both institutional and retail investors to purchase its securities d. A firm that invests its own capital with an issuer by buying securities that it plans to resell at a later date
b. Firm that assists an issuer by finding institutional investors to purchase its securities.
A fairness opinion would be most likely prepared by which of the following? a. A feasibility consultant b. A placement agent c. A pricing consultant d. An investment adviser
c. A pricing consultant A pricing consultant will issue a fairness opinion in a negotiated underwriting to state the price paid by the underwriter to the municipal issuer is fair. It is a type financial advice rendered by a type of municipal advisor.
A new issue of revenue bonds has just been offered for sale by the BWSW Turnpike Authority. Upon reading the Official Statement, you observe the existence of a nondiscriminatory rate covenant. This means: a. The facility built with the borrowed funds must observe all federal guidelines regulating minority group employment b. Hiring by the Authority must not discriminate between males and females c. Any user of the facility may not receive preferential rates or services d. Federal guidelines are subordinate to internally mandated regulations
c. Any user of the facility may not receive preferential rates or services
Which of the following statements concerning new issue municipal securities is TRUE? a. MSRB rules require all issuers to provide both preliminary and final official statements to all underwriters and other interested parties b. MSRB rules do not cover the official statement in any manner c. MSRB rules do not require the issuer to prepare an official statement however, if one is prepared, a copy must be given to each purchaser of the issue d. MSRB rules allow the substitution of an official notice of sale in lieu of an official statement as long as the underwriters attempt to provide adequate secondary market trading support
c. MSRB rules do not require the issuer to prepare an official statement however, if one is prepared, a copy must be given to each purchaser of the issue MSRB has NO jurisdiction over the issuer -However, it does have rules which tell MSRB members (your firm) what must be done concerning new issues being sold by the firm. -Each firm that sells a new issue to a client must send the client an official statement, if one has been voluntarily furnished by the issuer.
A dealer involved in a new competitive offering must apply for a CUSIP number: a. Prior to placing its bid b. At the formation of the syndicate c. No later than the date of award d. Within two business days of being awarded the bonds
c. No later than the date of award
The next highest bid in the primary market is referred to as the: Competitive bid Qualified bid Cover bid Workout bid
cover bid
Which of the following methods of primary financing may be required under state or local statute? a. A negotiated sale b. A private placement c. A direct loan d. A competitive sale
d. A competitive sale The primary offering of certain municipal bonds may be required to be sold by competitive sale under state or local statute.
The provisions for the flow of funds of a revenue bond issue appear in the: a. Syndicate letter b. Account summary statement c. Notice of Sale d. Indenture
d. Indenture The indenture contains all the agreements and covenants pertaining to a bond issue, and would contain the provisions for the application and allocation of funds of a revenue bond. -like flow of funds (debt service reserve fund, sinking fund, O&M fund, revenue fund)
The first step in preparing a bid for a competitive sale is: a. Set the coupon rate b. Set the maturities c. Set the bond's price d. Propose the reoffering yields
d. Propose the reoffering yields The reoffering yields are the yields at which the bonds will be sold to the public. -Since a syndicate's purpose in bidding for an issue is to resell it to the public, the first thing the syndicate must do is decide on the reoffering yields they believe will be needed to sell the issue. -The maturity structure is set by the issuer. -The bond's price is a result of coupon, maturity, and yield.
A municipal advisor is working with a school district that will be selling bonds to raise funds for a capital project. In determining whether to have the bonds rated, all of the following factors are important, EXCEPT: a. Reviewing issuers with a credit risk similar to your client b. Reviewing similar amounts of the par amount of bonds c. Reviewing the cost of ratings d. Reviewing the interest-rate environment of the municipal bond market in the last 12 months
d. Reviewing the interest-rate environment of the municipal bond market in the last 12 months interest rate environment is not as important as the current interest rate environment
he bond counsel for a new municipal revenue bond issue may render a qualified legal opinion in which TWO of the following situations? The issuer does not have clear title to the property Construction of a competing facility may cut projected revenue flow The underwriting syndicate has not provided information that the MSRB requires The project potentially could impact a national historic site I and III I and IV II and III II and IV
waht could make qualified legal option When situations exist that could create potential problems for a proposed facility, the bond counsel will render a qualified legal opinion. These situations include choices (I) and (IV) in that both subject the issuer to potential legal action, whereas choices (II) and (III) do not deal with the legality, validity, enforceability, or tax-exempt status of the issue.
