Series 7; Ch. 6

Front 1

Municipal Debt

Back 1

* Issued by states & counties & school districts of state

* All with maturities over 1 year must be issued in FULLY REGISTERED form

* Par value for munis = $1000

* Round lot is $100,000 par value

Front 2

Federal Tax Exemptions

Back 2

* Advantage of municipal bonds is that thier interest payments are NOT taxed on federal level

* State & local gov't give tax exempt status to any bond issued within that state

* Automatic Triple Tax Exempt Status: Puerto Rico, US Virgin Islands, Guam, American Somoa

Front 3

Private Activity Bonds

Back 3

* Subject to Alternative Minimum Tax (AMT) -Ensures that wealthy folks pay taxes too.

Front 4

Taxable Equivalent Yield

Back 4

* Richer an investor is, the more they would benefit from a muni's tax exempt status.

* Due to tax advantages munis have, they are NOT wise investments for tax deferred accounts such as retirement & pension plans.

Front 5

Formula: Tax Equivalent Yield

Back 5

Tax Equivalent Yield = Muni Yield / (100% - Tax Bracket%)

Front 6

Net Yield

Back 6

If you have a taxable bond, & you want to find what a muni needs to yield to give the same return, find the NET YIELD.

Front 7

Formula: Net Yield

Back 7

Net Yield = Taxable Yield x (100% - Tax Bracket%)

Front 8

Discount Bonds

Back 8

if a bond si bought @ a discount in the secondary market & held to maturity, there will be a taxable gain reported as ordinary income

Front 9

Original Issue Discount (OID) Bonds

Back 9

* Zero coupon bonds = accredited = tax exempt

*If OID bond is sold proior to maturity ABOVE the accredited amount, it would be taxed as capital GAIN.

* If OID bond is sold BELOW, it would be capital LOSS

Front 10

Premium Bonds

Back 10

* Bonds bought @ premium to par must be AMORTIZED each year.

* When bond is amortized, portion of premium is written off each year.

Front 11

Bank Qualified Issues

Back 11

* Used to encourage banks to buy muni bonds

* If bank uses depositor's money to invest in munis, bank can write off 80% of interest costs they are paying to depositors

Front 12

Municipal Obligations; 3 basic types of debt

Back 12

1) General Obligation Bonds

2) Revenue Bonds

3) Anticipation Notes

Front 13

General Obligation Bonds

Back 13

* States issue GO bonds which are secured by taxing income, sales, gasoline

Front 14

Ad Volerem Taxes (Property Taxes)

Back 14

* Levied on assessed value of pproperty, NOT market value

* Amount of the tax is expressed in millions

Front 15

Formula: Tax Paid

Back 15

Assessed Value x Million Rate

Front 16

Voter Referendum

Back 16

* Approval is required for GO bond, because it's the public's tax dollars that would be used to repay the debt.

Front 17

Debt Statement

Back 17

1) Direct Debt = All the debt issued by the issuer

2) Net Direct Debt = All the direct debt minus any "self-supporting" debt such as revenue bonds & anticipation notes.

3) Overlapping debt = debt of school districts which overlaps the tax base of another

Front 18

Formula: Net Overall Debt

Back 18

Net Overall Debt = the Net Direct debt + Overlaping debt

Front 19

Debt Per Capita

Back 19

A municipalities Net Overall Debt divided by its total population

Front 20

Revenue Bonds

Back 20

Used to build facilities that charges somefees, i.e. tolls, airports, bridges hospitals, turnpikes, water systems

Front 21

Housing Revenue Bonds

Back 21

* Used to help low to moderate income families buy homes

* Proceeds to real estate developers or bolster mortgage market

Front 22

Health Care Revenue Bonds

Back 22

* Build Hospitals

Front 23

Utility revenue bonds

Back 23

* Build gov't owned electric, gas water & sewer systems

Front 24

Special Assessment bonds

Back 24

* Sidewalks, street lights

Front 25

Transportation BOnds

Back 25

* Turnpikes, bridges, airports, public transit systems.

Front 26

Industrial Development Revenue & Pollution Control Revenue Bonds

Back 26

* Lease agreement w/a corp

Front 27

Special Tax Bonds

Back 27

*Debt service is paid through proceeds froma specific tax, i.e. roads build with gasoline tax

Front 28

Double Barrelled bonds

Back 28

* Backed by 2 sources of revenue, usually tax dollars & project's revenue

Front 29

Moral Obligation Bonds

Back 29

* Bonds are secured by the revenues of a project

Front 30

Public Housing & New Housing Authority BOnd

Back 30

* Build low income housing, section 8 housing, NO longer issued

Front 31

Analyzing Revenue Bonds

Back 31

* Self supporting, economically viable

Front 32

Debt Service Coverage Ratio

Back 32

* Higher the ratio, the more secure the coverage

Front 33

Flow of Funds

Back 33

* Tells invostors in what order the revenues are to be spent.

Front 34

Net Revenue Pledge

Back 34

* Operating & maintenance costs are paid prior to debt service

Front 35

Gross Revenue Pledge

Back 35

* Debt service is paid first, less common, used most often w/health care revenue bonds.

Front 36

Revenue Fund

Back 36

* Operation & Maintenance Fund

* Debt Service Fund

* Debt Service Reserve Fund

* Replacement & Renewal Fund

* Sinking Fund

* Surplus Fund

Front 37

Revenue Bond Covenants

Back 37

* Rate Covenant - States that the issuer promises to keep rates @ a level sufficient to pay debt service & operation & maintenance cost

* Maintenance Covenant - Keep facility in good repair

* Insurance Covenant - Keep facility properly insured

* Non-Discrimination Covenant - Not to give special rates to person/group. Keep accurate financial reports/audits. Indenture is Open-Ended

Front 38

Anticipation Notes

Back 38

* Short term interest bearing securities

* Pay interest upon maturity

* Used in Bridge Financiing

Front 39

Tax Anticipation Notes

Back 39

* Usually GO Securities

* Used to finance current municipal operations

* Paid w/future taxes

Front 40

Bond Anticipation Notes

Back 40

* Used to financeprojects which will be paid for w/a future bond issue

Front 41

Grant Anticipation Notes

Back 41

* Issued w/expectations of receiving federal grant

Front 42

Revenue Anticipation NOtes

Back 42

* Usually GO securities

* Will be paid w/future revenues of a project

Front 43

Construction loan Notes

Back 43

* Used to start construction projects which will eventually be funded through a bond issue

Front 44

Insuring municipal Bonds

Back 44

When a bond is insured, it receives the highest credit rating from Moody's and S&P

Front 45

Optional Redemption

Back 45

* Issuer can call the bonds AFTER a certain date, but they have no obligation to do so.

Front 46

Mandatory Redemption

Back 46

* Indenture requires the issuer to call bonds on a set schedule

* Bonds are drawn randomly

* When part of the issue is called, the credit rating of the remaining issue will increase as the issuer demonstrates their ability to pay.

Front 47

Extraordinary Optional Redemption

Back 47

* If an unusual event specified in the indenture occurs, the issuer has the option to call the bonds, i.e. mortgages are prepaid

Front 48

Extraordinary Mandatory Redemption

Back 48

If an event in the indenture occurs, the issuer must call the bonds, i.e. earthquake, hurricane; Catastrophe Call Covenant

Front 49

Refunding

Back 49

*New bons are issued to retrie old bonds

Front 50

Defeasance

Back 50

Issuer issues debt while interest rates are low, they can issue debt & buy US Gov securities & place them in trust to be used to pay off the old bonds.

*Issues are AAA rated & trade @ low yields

*If escrowed to maturity, the original bonds are considered to by advanced refunded

*if escrowed to call, the orginal bonds are considered to be pre-refunded

Front 51

Tender Option

Back 51

Allows the bond holder to "put" the bonds back to the issuer

Front 52

Tender Offer

Back 52

Allows the issuer to retire old debt prior to maturity. It is done w/non-callable bonds.