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31 Cards in this Set
- Front
- Back
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Municipal bonds are classified into two categories
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General Obligation Bonds and Revenue Bonds
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Which type of municipal bond requires voter approval?
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GO Bonds
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What provides backing for state and local GO bonds? |
For state, income tax, sales tax, gas tax, excise tax. For local it is typically property tax which includes school tax
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Ad Valorem Tax
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Property Tax, determined based on the tax rate levied and expressed in terms of mills. One mill equates to $1 per $1,000 of assessed value
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What are reasons why a local GO bond wouldn't be positively reviewed? |
Unfunded Pension Liabilities, Financial Condition, Tax Limitations
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What factors are included on a muni's debt statement?
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Direct Debt: All debt issued Net Direct Debt: Direct Debt minus revenue and note issues (typically only GO debt) Overlapping Debt: Multiple authories in an area being able to tax same residents Total Bonded Debt: SUm of both long/short term debt plus applicable share of overlapping debt |
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What is a moral obligation bond?
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If revenues are insufficient to pay debt, state is morally obligated (but not legally required) to provide needed funds. Legislative approval must be obtained before issuing an MO bond
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Private Activity or Alternative Minimum Tax Bonds (AMT)
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If 10% or more of bond proceeds finance a project for a private entity (sports team) AMT can be lieved, bond's interest taxed at fed level. Typically used to ensure wealthy taxpayers pay a minimum amount of tax
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Build America Bonds (BABs)
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Bonds issued under ARRA Act of 2009. Issuers receive a reimbursement from US Treasury for 35% of interest paiud on bonds
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Escrowed to Maturity Bonds
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Similar to refunded bonds but without a call feature. Have a higher credit rating
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Parity Bonds
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Two or more issues of revenue bonds are backed by same pledged revenues
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Difference between Net Revenue Pledge and Gross Revenue Pledge
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Net revenue has operating/maintanence expenses are deducted before revenues are applied. Gross revenue pledge indicates that debt service is paid prior to operating/maintanece expenses deducted
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Debt Service Coverage Ratio
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Divide Net Revenue by Debt Service (amount needed to pay off bond debt)
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Trust Indenture Covenants
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Provisions found in bond's indenture that should be examined in addition to debt service ratio to understand if bond can be paid off. Can include things like Rate Convenant, Maintance Convenant, Insurance, Non-discrimination
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Flow of Funds for handling revenues in a bond contract
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Typically goes as follows: Operating and Maintanence Fund Debt Service Fund Debt Service Reserve Fund Reserve Maintanence Fund Replacement & Renewal Fund Surplus Fund Construction Fund |
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Difference between TANs and RANs`
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TANs are issues by munis in anticipation of property tax reeipt. RANs are issued in anticipation of federal/state subsidies. TRANS are created when TANs and RANs are issued together |
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Difference between BANs, GANs, CLNs
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BANS are for projects taht will be financed by long-term bonds. GANs are in expectation of grants for fed gov't. CLNs are issed to provide funds for construction of project that will be funded by a long term bodn
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Ratings for Municipal Notes
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Moody's has four categories, 3 of good quality and 1 speculative. S&P has 3 ratings, 2 of decent and 1 of poor
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Choices for the owner of an Auction Rate Investment (ARS)
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Hold at Market: keep the security regardless of rate set at auction Hold at Rate or Bid: Owner holds position at a specific minimum rate Sell: Sell position regardless of rate |
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When do ARS auctions fail?
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When there are not enough bids to purchase all of the securities being offered for sale in the auction
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Difference between an ARS and a Variable Rate Demand Obligation (VRDOs) |
Only VRDOs have a put feature that allows holder to sell securities to a third party. VRDOs also have an interest rate that is reset by dealer that allows teh security to be sold at par value |
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Triple Tax Exempt Issues
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Bonds issued by a territory or possession of US are not subject to fed, state or local taxes
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Bank Qualified Issues
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Banks that invest in BQ issues can deduct 80% of interest cost being paid to depositors
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Arbitrage Restrictions for Munis
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State and Local Governments cannot issue bonds to buy treasuries since the tax exempt status on their bonds has a lower coupon than a treasury
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Tax Rules for Bonds
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Corporate Bonds: Fed/State US Gov't: Fed Muni Bonds: Possible State (not in-state) Territorial Bonds: Nothing |
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Calculating Net Yield After Tax
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Net Yield = Taxable Yield x (100% - Tax Bracket %). This is helping when figuring out how a muni compares to a corporate bond
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Taxable Equivalent Yield
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Taxable Equivalent Yield = Municipal Yield/ (100% - Tax Bracket %) This is helpful when comparing muni bond to a corporate bond |
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Original Issue Discount Bond Tax Rules
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Held to Maturity: Each year accreted amount is treated as untaxable interest, at maturity there is no gain Sold Prior to Maturity: Cost basis (adjusted for accretion) is used to calculate gains/losses |
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Secondary Market Discount Tax Rules
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Held to Maturity: Accreted amount is ordinary income and is taxable. At maturity, difference between purchase price and par is ordinary income and is taxable Sold Prior to Maturity: Adjusted Cost Basis (for accretion) used to calculate gain/loss |
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Premium Bond Tax Rules
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Held to Maturity: Amoritized amount is subtracted from cost each year. At maturity there will be no loss due to this Sold Prior to Maturity: Original Cost - Amortization will be used to calculate gain/loss |
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Why would a tax swap be done?
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If a bond has declined in value and the owner wants to realize a loss they can sell the bond and repurchase a similar one but note the loss on sale
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