Series 7 - Municipal Bonds
Bonds subject to the AMT will trade with a _________ yield.
Bonds subject to the AMT will trade with a higher yield.
Are Visible Supply figures compiled daily or weekly?
Daily
Is the average credit rating of the Revenue Bond Index higher or lower than the GO Bond Indexes?
Lower; the average is A+/A1.
The maximum maturity of commercial paper is ____ days.
The maximum maturity of commercial paper is 270 days.
What does 1 mill equal?
$1.00 per thousand dollars of assessed value (.001 as a decimal)
$_____ is the MSRB gift rule limitation.
$100 is the MSRB gift rule limitation (same as FINRA).
List the priority of orders from first to fourth.
1. Presale orders 2. Group net orders 3. Designated orders 4. Member orders
Put the following four types of orders in the correct priority: Group Net, Member, Presale, Designated
1) Presale 2) Group Net 3) Designated 4) Member (Remember: P, G, D, M)
Name the three components of the spread for a bond offering.
1. Manager's fee 2. Additional takedown 3. Sales concession
When do municipal bond trades settle?
3 business days after the trade date (T+3)
A BD that is a part of the selling group (not a syndicate member) would only be entitled to the ____________________.
A BD that is a part of the selling group (not a syndicate member) would only be entitled to the sales concession.
If a BD wants to sell municipal bonds and have significant exposure to different bids, who should it contact?
A Broker's Broker
A bond backed by a charge to benefiting property owners is called a __________________________.
A bond backed by a charge to benefiting property owners is called a special assessment bond (e.g., water/sewer system).
What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?
A capital gain or loss determined by the difference between the adjusted basis and the proceeds of the sale
What is the tax consequence if a municipal Original Issue Discount (OID) bond is sold prior to maturity?
A capital gain or loss determined by the difference between the adjusted basis and the proceeds on the sale
A decision of the ___________________ created the tax exemptions for government and municipal bonds.
A decision of the U.S. Supreme Court created the tax exemptions for government and municipal bonds.
A __________________ is a revenue bond backed by one specific tax.
A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)
What is the penalty for political contributions that violate the rule?
A two-year ban on obtaining negotiated underwriting business from the issuer
Moody's rates municipal notes using ______, ______, ______, ______.
Moody's rates municipal notes using MIG1, MIG2, MIG3, SG.
Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.
Accrued interest on municipal bonds is calculated using 30 days in the month and 360 days in the year
For municipal bearer bonds, what factors determine good delivery?
All unpaid coupons attached and the bonds denominated in $1,000 or $5,000 increments
What is a municipal OID?
An Original Issue Discount (OID) bond.
Any quote qualified by the terms "subject", "workout," or "nominal" is not considered a ______ quote.
Any quote qualified by the terms "subject", "workout" or "nominal: is not considered a firm quote.
How is property tax calculated?
Assessed value x millage rate
How often will VRDOs adjust their interest rate?
At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
Who enforces MSRB rules?
BD Enforcement: SEC or FINRA and Bank Dealer Enforcement: FRB, FDIC, or the Comptroller of the Currency
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What are some examples of tax-free money-market instruments?
Municipal notes and tax-exempt commercial paper
Who may issue bonds that offer interest that is triple tax-exempt?
Commonwealths, territories, and possessions (e.g., Puerto Rico)
What is the IRS method for accreting the basis of a bond?
Constant yield or constant interest method
What is created when a BD employee has influence over the debt service of an issuer (e.g., an employee is a mayor)?
Control relationship
Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?
Debt Service (with Operating and Maintenance first)
Define overlapping debt.
Debt of a municipality that is shared with another political entity (e.g., school district debt)
Debt service represents the total of all ____________ and ____________ payments.
Debt service represents the total of all principal and interest payments.
List some of the information to be included on municipal dealer-to-dealer confirmations.
Description, call features, yield/price, final dollar amount, confirming/contra party, trade/settlement dates, CUSIP #
____________ orders are given to a syndicate and identify two or more members (not all) to receive credit for the sale.
Designated orders are given to a syndicate and identify two or more members (not all) to receive credit for the sale.
What is level debt service?
Each year's debt service payments remaining generally equal.
True or False: The legal opinion addresses the creditworthiness of an issue.
False. Legal opinions address the legality (authority/validity) of the issue and the tax exemption of the interest.
True or False: MBIA, FGIC, and AMBAC protect customers against broker-dealer bankruptcy.
False. MBIA, FGIC, and AMBAC insure municipal bond offerings, while SIPC protects against broker-dealer bankruptcy.
True or False: Municipal securities representatives may sell municipal bond funds.
False. Municipal representatives may only sell individual municipal bonds.
True or False: In the Bond Buyer, the Visible Supply figure includes both municipal and corporate bonds.
False. The Visible Supply figure shows only municipal bonds that are being offered on a negotiated or competitive basis.
True or False: The credit rating of an IDR is based on the credit of the municipality.
False. The rating is based on the corporation making the lease payments.
True or False: Disclosure is not needed if a control relationship exists and bonds are placed in discretionary accounts.
False. To place those bonds in the client's account, specific written customer authorization is required.
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
What relationship is created when a BD receives a fee for giving advice to a municipality regarding a new issue?
Financial Advisory relationship
General Obligation (GO) bonds are backed by the issuer's ________________________ and their ability to levy _______.
General Obligation (GO) bonds are backed by the issuer's full faith and credit and their ability to levy taxes.
______________________ bonds would most likely require voter approval.
General Obligation (GO) bonds would most likely require voter approval.
What orders benefit the entire syndicate by percentage of liability?
Group net orders
Is the average credit rating of the 11 GO Bond Index higher or lower than the 20 GO Bond Index?
Higher; the average is AA+/Aa1.
If a bond counsel has no concerns related to the new offering, the counsel may render an ______________ opinion.
If a bond counsel has no concerns related to the new offering, the counsel may render an unqualified opinion.
Where can Notices of Sale be found?
In The Bond Buyer (The Daily Newspaper of Public Finance)
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
Interest paid on bonds issued by U.S. territories or possessions is ___________________.
Interest paid on bonds issued by U.S. territories or possessions is triple-tax-exempt.
What condition must exist for a municipal bond's interest to be exempt at the state and local level?
Investors must buy the bond from the state in which they reside.
What is the purpose of a Tombstone Ad?
It calls attention to the new issuance of securities and members of the syndicate.
How is the phantom interest on an OID treated for tax purposes?
It is considered interest income on a municipal bond, and therefore, tax exempt.
MIG stands for ___________________________.
MIG stands for Moody's Investment Grade.
_________ orders are those in which only one member earns the total takedown.
Member orders are those in which only one member earns the total takedown.
Who is the associated person who primarily engages in or supervises municipal securities business?
Municipal Finance Professional (MFP)
What is the appropriate registration designation to supervise the municipal activity for a BD?
Municipal Securities Principal (Series 53)
Who supervises a firm's municipal activities and provides account approval, transaction review, and complaint handling?
Municipal Securities Principal (Series 53)
Municipal bond interest is exempt from __________ tax.
Municipal bond interest is exempt from federal tax.
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future real estate taxes
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
Is it mandatory for a municipal issuer to prepare an Official Statement?
No, but if one has been prepared, the MSRB requires BDs to distribute it.
Are BDs who violate the political contribution rule banned from obtaining competitive underwriting deals from issuers?
No, since the deal is obtained on the merits of the bid.
Do S&P and AM Best insure municipal bonds?
No, they provide bond ratings.
Is an official statement or preliminary official statement considered retail communication?
No. However, a summary or abstract of an official statement is considered retail communication.
A B/D has a financial advisory relationship with an issuer. May it underwrite the issuer's bonds on a competitive basis?
No. Rule G-23 bans an advisor from acting as an underwriter for the same issuer on a negotiated or competitive basis.
A B/D has a financial advisory relationship with an issuer. May it underwrite the issuer's bonds on a negotiated basis?
No. Rule G-23 bans an advisor from acting as an underwriter for the same issuer on a negotiated or competitive basis.
Does the MSRB have the authority to enforce its own rules?
No. The MSRB has no enforcement authority.
What advertises that municipal bonds are available and invites underwriters to bid on a new competitive issue?
Notice of Sale
What is the disclosure document, similar to a prospectus, that is used for municipal bonds?
Official Statement
Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?
Operating and Maintenance Fund
If a control relationship exists, how may the relationship be disclosed?
Orally, before a trade, and then in writing, at or before settlement
Political contribution rules allow MFPs NOT able to vote for a candidate to contribute a max. of $___ (per election).
Political contribution rules allow MFPs NOT able to vote for a candidate to contribute a max. of $0 (per election).
Political contribution rules allow MFPs who may vote for a candidate to contribute a maximum of $_____ (per election).
Political contribution rules allow MFPs who may vote for a candidate to contribute a maximum of $250 (per election).
What orders are placed prior to the actual awarding of the issue to the syndicate?
Presale orders
What types of municipal bonds are most likely subject to the Alternative Minimum Tax?
Private Activity bonds
For municipal registered bonds, what factors determine good delivery?
Proper assignment and the bonds denominated from $1,000 to $100,000 in $1,000 increments
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
When analyzing GO bonds, what are some important considerations?
Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities
What type of opinion will a bond counsel render if the legality of the issue is in question or a lawsuit is pending?
Qualified
______________ is the return of municipal bonds that were originally accepted for delivery.
Reclamation is the return of municipal bonds that were originally accepted for delivery.
____________ is the buyer's refusal to accept the delivery of municipal bonds.
Rejection is the buyer's refusal to accept the delivery of municipal bonds.
When bidding on a new issue, what will underwriters first determine?
Reoffering Yield
What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?
The gain is taxed as ordinary income.
Which bond would most likely require a feasibility study to be issued?
Revenue Bond
Revenue bonds are backed by ___________________ generated by ________________________.
Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
When will a cash trade for a municipal bond settle?
Same day
Series ____ or Series _____ will qualify an individual to sell municipal securities.
Series 7 or Series 52 will qualify an individual to sell municipal securities.
What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?
Since the basis must be accreted up to par, there is no capital gain or loss when an OID is held to maturity.
What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?
Since the basis must be amortized down to par, there is no capital gain or loss when a premium bond is held to maturity.
Is the Placement Ratio compiled daily or weekly?
Weekly
Standard & Poor's three ratings for municipal notes are ______, ______, ______.
Standard & Poor's three ratings for municipal notes are SP-1, SP-2, SP-3.
The 20 GO Bond Index is composed of ____ GO bonds with ____-year maturities.
The 20 GO Bond Index is composed of 20 GO bonds with 20-year maturities.
Where can Visible Supply figures and the Placement Ratio for municipals be found?
The Bond Buyer
Who is responsible for the formulation and interpretation of rules for the municipal industry?
The MSRB
The Visible Supply figure indicates the number of municipals expected to reach the market within the next ____ days.
The Visible Supply figure indicates the number of municipals expected to reach the market within the next 30 days.
An OID is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?
The accreted value of the bond.
The average rating for the 20 GO Bond Index is ____________.
The average rating for the 20 GO Bond Index is AA or Aa2.
The document underwriters submit to issuers when bidding on a competitive issue is called the ______________________.
The document underwriters submit to issuers when bidding on a competitive issue is called the Official Bid Form.
The formula for net (after-tax) yield is: __________ x (________- ________)
The formula for net (after-tax) yield is: Taxable Yield x (100% - Tax Bracket %)
The formula for taxable equivalent yield is: __________ ÷ (________ - ________)
The formula for taxable equivalent yield is: Tax-Free Yield ÷ (100% - Tax Bracket %)
The index showing the average yield on 25 revenue bonds with 30-year maturities is called the ______________________.
The index showing the average yield on 25 revenue bonds with 30 year maturities is called the Revenue Bond Index.
How is the underwriter determined for a Competitive Sale?
The issuer invites syndicates to bid on the issue, with the best bid (lowest interest cost) winning the competition.
How is the underwriter determined for a Negotiated Sale?
The issuer selects the underwriter it would like to work with, and they negotiate the offering terms.
What does the Placement Ratio indicate?
The number of bonds that were sold during the week compared to what was available for sale (the demand side)
The process of adjusting the basis of a premium bond down to par over its life is called _______________.
The process of adjusting the basis of a premium bond down to par over its life is called amortization.
The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.
The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called accretion.
The ___________________ has the authority to change the priority of orders.
The syndicate manager has the authority to change the priority of orders.
What is the spread minus the manager's fee?
The total takedown
What would a member of the syndicate (not the manager) earn for selling bonds?
The total takedown
The total takedown is made up of ____________ + _____________.
The total takedown is made up of Additional takedown + Sales concession.
What is the difference between what the syndicate pays the issuer for the new issue and the public offering price?
The underwriting spread
Those qualified as municipal RRs (Series 52) may sell, trade, or underwrite municipals, but may not ____________ sales.
Those qualified as municipal RRs (Series 52) may sell, trade, or underwrite municipals, but may not supervise sales.
To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________
To calculate Debt Service Coverage Ratio, the formula used is: (Gross Revenue - O/M Expenses) ÷ Debt Service
Why will the manager prioritize orders for the purchase of bonds sold through the syndicate?
To give the maximum benefit to the entire syndicate as a group versus any one particular member
What is exempt from the 5% policy?
Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds
What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?
Triple-tax-exempt interest
True or False: An increase in unfunded pension liabilities is a negative sign of the municipality's creditworthiness.
True
True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.
True
True or False: Syndicate managers may change the priority of orders if justifiable and in the syndicate's best interest.
True
True or False: The 11 GO Bond Index is composed of 11 of the 20 bonds in the 20 GO Bond Index.
True
True or False: The Syndicate Letter is also referred to as the Agreement Among Underwriters.
True
At bid submission, does Net Interest Cost (NIC) or True Interest Cost (TIC) take into account the time value of money?
True Interest Cost (TIC), also called the Canadian Method
True or False: MSRB rules regulate the municipal activities of BDs, banks, and the employees of these institutions.
True. The MSRB also regulates municipal advertising.
What is the document that establishes the agreement between the issuer and the underwriter?
Underwriting Agreement
What information would the manager of a municipal underwriting provide in the Syndicate Letter?
Underwriting type (negotiated/competitive), amount, allocation, priority of orders, type of account (eastern/western)
If a bid is unsuccessful, when must the manager return the syndicate member's portion of the good-faith deposit?
Within 2 business days of its return from the issuer
For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?
Yes. A Legal Opinion must be imprinted or attached (unless identified as ex-legal).