Unit 3 - Municipal Securities

The purchaser of a GO bond should be concerned with 1.call provisions. 2.legislation. 3.market risk. 4.credit risk.

All of the listed

registered representative takes a customer order for a when-issued municipal bond. Payment is due: A) 5 business days after the order is taken. B) 3 business days after the bond is available from the issuer. C) on the next business day after issue. D) 10 business days after order is taken

Your answer, 3 business days after the bond is available from the issuer., was correct!. When-issued means the security (a municipal bond in this case) will be forthcoming at some time in the future. The order can be taken now, but payment is not due until 3 business days (regular way settlement) after the bond is available from the issuer. Reference: 3.2.8 in the License Exam Manual.

Which of the following quotes represents a municipal dollar bond quote? A) 0.085. B) 85.24 - 85.30. C) 85½. D) 8.20 - 8.00.

Your answer, 85½., was correct!. Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85½% of $1,000, or $855. Dollar bonds are also called term bonds. Reference: 3.4.1.1 in the License Exam Manual.

A municipal bond subject to a refunding call must be quoted at yield-to-call in which of the following instances? A) A bond at par callable at a premium. B) A bond at par callable at par. C) A bond at a discount callable at par. D) A bond at a premium callable at par.

Your answer, A bond at a discount callable at par., was incorrect. The correct answer was: A bond at a premium callable at par. An investor's yield would be less on a premium bond if called at par, rather than if allowed to mature. Thus, a registered representative must quote the lower potential yield scenario (in this case, yield-to-call). Reference: 3.4.5.1 in the License Exam Manual.

Which of the following is contained in an official notice of sale? A) Amount of good faith deposit. B) Delivery date. C) Reoffering yields on the bond . D) Agreement among underwriters.

Your answer, Agreement among underwriters., was incorrect. The correct answer was: Amount of good faith deposit. The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters. Reference: 3.2.2.1 in the License Exam Manual.

Which of the following types of municipal bonds is subject to statutory debt limits? A) General obligation (GO) bonds. B) Special tax bonds. C) Industrial development revenue (IDR) bonds. D) Hospital bonds

Your answer, General obligation (GO) bonds., was correct!. Only GO bonds, which are backed by the taxing authority of the issuer, are subject to statutory debt limits

MSRB rules state that a customer confirmation must indicate which of the following? 1.Whether the trade was made as an agency transaction 2.Whether the sale was made from the dealer's inventory 3.The amount of the dealer's markup or markdown 4.The location of the trust indenture. A) II and IV. B) III and IV. C) I and III. D) I and II.

Your answer, I and III., was incorrect. The correct answer was: I and II. MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade need not be disclosed. The commission on an agency trade must be disclosed. The official statement must include the location of the trust indenture and a statement that bondholders may review it if they choose. Reference: 3.4.5.1.2 in the License Exam Manual.

An underwriting bid for a municipal GO issue would include which of the following? 1.The dollar amount. 2.The coupon rate. 3.The yield-to-maturity. 4.The underwriting spread. A) II and III. B) I and III. C) II and IV. D) I and II.

Your answer, I and III., was incorrect. The correct answer was: I and II. The only information the underwriter must furnish to the issuer is the dollar amount of the bid (the amount the issuer will receive) and the coupon rate (the amount of interest the issuer will pay). From this the issuer can determine the lowest net interest cost and award the bonds on that basis. Reference: 3.2.5.1 in the License Exam Manual.

The MSRB rules regarding quotes for municipal securities apply to which of the following? 1.Bid wanted. 2.Offer wanted. 3.Bid disseminated by any means of communication. 4.Offer disseminated by any means of communication. A) I, II, III and IV. B) II and III. C) I and II. D) I and IV.

Your answer, I, II, III and IV., was correct!. MSRB rules state that all quotes, including bids wanted and offers wanted, are fair and reasonable based on the prevailing market. These rules apply to quotes, bids, or offers disseminated by any form of communication. Reference: 3.4.1 in the License Exam Manual.

In what order, from first to last, would a syndicate member allocate orders for a new municipal bond issue? 1.Presale orders. 2.Designated orders. 3.Member orders. 4.Group net orders.

Your answer, I, IV, II and III., was correct!. The standard order priority for municipal bond issue allocation as stated within the syndicate letter is: presale, group, designated, and member. Orders that benefit all syndicate members have the highest priority.

The interest from which of the following bonds is subject to federal income tax? 1.State of Nebraska. 2.City of Duluth. 3.Treasury notes. 4.FNMA. A) I and II. B) III and IV. C) II and IV. D) I and III.

Your answer, II and IV., was incorrect. The correct answer was: III and IV. Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax. Reference: 3.4.8.1 in the License Exam Manual.

Which of the following are TRUE of revenue bonds? 1.They are secured by a specific pledge of property. 2.They are a type of general obligation bond. 3.They are not subject to the statutory debt limitations of the issuing jurisdiction. 4.They are analyzed primarily on the project's ability to generate earnings. A) I and II. B) II and III. C) III and IV. D) I and IV.

Your answer, III and IV., was correct!. Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond-they are backed by project revenue. Reference: 3.1.2.2 in the License Exam Manual.

Which of the following may only be accomplished after applying the additional bonds test for a revenue bond? A) Increasing the project's user charges. B) Spending revenues already allocated for project expansion. C) Issuing new bonds with an equal lien on the project's revenues. D) Prerefunding an outstanding bond issue

Your answer, Issuing new bonds with an equal lien on the project's revenues., was correct!. The additional bonds test must be met under the provisions of a revenue bond indenture before additional bonds with an equal lien on project revenues can be issued. The conditions under which additional bonds may be issued are specified in the bond indenture. This is an open-end covenant. Reference: 3.1.2.2.4 in the License Exam Manual.

Which of the following debt instruments generally present the least amount of default risk? A) Convertible senior debentures. B) Municipal revenue bonds. C) Municipal general obligation bonds. D) High-yield corporate bonds.

Your answer, Municipal general obligation bonds., was correct!. Because the full taxing power of the municipality backs a general obligation municipal bond, it will exhibit the least amount of default risk. A corporate debenture is an unsecured bond with a greater degree of risk, as is a junk or high-yield corporate bond. Reference: 3.1.2.1 in the License Exam Manual.

Which of the following municipal securities are backed by the full faith and credit of the U.S. government? A) Tax assessment bonds (TAs). B) General obligation bonds (GOs). C) Industrial revenue bonds (IRBs). D) Public Housing Authority bonds (PHAs).

Your answer, Public Housing Authority bonds (PHAs)., was correct!. Public Housing Authority bonds are backed by the full faith of the U.S. government, which guarantees rent payments on these low-income properties. Reference: 3.1.2.2.5 in the License Exam Manual

Which of the following documents sets forth the priority of sale of securities? A) An offering circular. B) The official notice of sale. C) The syndicate letter. D) A tombstone.

Your answer, The syndicate letter., was correct!. The syndicate letter lists the terms under which members will conduct the sale of the bonds. It also describes each member's sharing of profits and expenses, the type of business entity (i.e., joint venture or partnership), and the good faith deposit required. Reference: 3.2.4 in the License Exam Manual.

A customer has written a letter of complaint to the dealer. On receipt of the complaint, a municipal securities dealer must first: A) accept the complaint and record the action taken. B) notify the examining regulatory authority. C) refund any money to the customer making the complaint . D) submit to arbitration.

Your answer, accept the complaint and record the action taken., was correct!. On receipt of a customer complaint, the municipal securities dealer must accept the complaint, record the action taken, put it in a complaint file, and respond. Responses also become part of the complaint file. Reference: 3.5.1.1 in the License Exam Manual.

A municipal bond, issued with a covenant that states, "If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality," is known as a: A) Section 8 bond. B) contingent liability bond. C) double-barreled bond. D) moral obligation bond.

Your answer, double-barreled bond., was correct!. When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a double-barreled bond. Reference: 3.1.2.1.2 in the License Exam Manual.

A syndicate member in a municipal underwriting wishes to place an order with the manager for its own portfolio. Under MSRB rules, an order for a related portfolio must be: A) entered as a presale order. B) disclosed to the manager. C) entered as a group order. D) entered as a designated order.

Your answer, entered as a presale order., was incorrect. The correct answer was: disclosed to the manager. Disclosure is necessary to allocate orders. An order for a related portfolio will be accorded member status, the lowest priority. Reference: 3.2.7.2.4 in the License Exam Manual.

A statutory debt limitation restricts a municipality's authority regarding A) selling revenue bonds. B) insuring bond issues. C) issuing general obligation (GO) bonds. D) raising tax rates.

Your answer, issuing general obligation (GO) bonds., was correct!. A municipality may be limited by statute regarding the amount of GO debt it may incur. Reference: 3.1.2.1.2 in the License Exam Manual.

A qualified legal opinion issued for a municipal bond underwriting means that the: A) legal opinion is qualified with restrictions and conditions. B) bond counsel is considered competent. C) bond attorney is qualified to express his opinion on the bond. D) revenue bond issue has certain debt limitations .

Your answer, legal opinion is qualified with restrictions and conditions., was correct!. The word "qualified" describes the legal opinion, not the attorney (or bond counsel) who issued it. A qualified legal opinion is one in which the bond counsel expresses reservations about conditions that may affect the bond's status. An unqualified legal opinion is rendered without restriction or condition. Reference: 3.1.3.5 in the License Exam Manual.

A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to: A) the 102 call. B) maturity. C) maturity or yield to call, whichever is higher . D) maturity or yield to call, whichever is lower .

Your answer, maturity or yield to call, whichever is lower ., was incorrect. The correct answer was: the 102 call. MSRB rules require that when a call date has been fixed by a prerefunding, the resulting yield to call must be reflected on the confirmation. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event; therefore, it is appropriate to price the bond to the call date. The original maturity on the bond has no further significance. Reference: 3.4.5.1 in the License Exam Manual.

Scale in a municipal bond underwriting refers to A) price by maturity. B) the order of the lowest net interest cost to the municipality. C) yields by maturity. D) profit per bond.

Your answer, the order of the lowest net interest cost to the municipality., was incorrect. The correct answer was: yields by maturity. Short maturity bonds usually yield less than do longer maturities. This scale of yields can be converted into dollar prices to allow underwriters to calculate a bid for an issue. Reference: 3.2.5 in the License Exam Manual.

In a negotiated municipal bond underwriting all of the following are true EXCEPT: A) the underwriter works with the issuer to establish the offering price. B) the underwriter works with the issuer to establish the interest rate. C) the municipality appoints an investment banker or broker/dealer to underwrite the offering. D) the underwriters may also be financial advisors to the municipality and receive both advisory fees and underwriting fees.

Your answer, the underwriters may also be financial advisors to the municipality and receive both advisory fees and underwriting fees., was correct!. In a negotiated underwriting, the municipality appoints an investment banker or broker/dealer to underwrite the offering. The underwriter works with the issuer to establish the interest rate and the offering price in light of the issuer's financial needs and market conditions. Generally those acting in the capacity of financial advisor to a municipality may not simultaneously act as underwriters. This is true of both negotiated and competitive bid underwritings. While the MSRB rules do allow for certain exceptions, the fees collected would be limited to only those already agreed to for the advisory services and not include any additional fees for performing underwriting functions or services. Reference: 3.5.1.1 in the License Exam Manual.