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57 Cards in this Set

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  • Back
What are the three categories of Municipal Bonds?
-General Obligation Bonds (GO's)
-Revenue Bonds
-Municipal Notes
General Obligation Bonds
-Backed by taxes
-Issued for facilities that will benefit the public (schools, libraries, city hall)
-Before a GO can be issued to the public, it must be put on the ballot and voter approved
-Each municipal entity has statutory debt limits that it must obey
-Usually not issued as callable
-No flow of funds, no protective convenants
Revenue Bonds
-Backed by user charges (toll roads, airport fees, etc)

-Can also be backed by lease payments, license fees (fishing tags, etc), and SPECIAL taxes (on cigarettes, liquor)

-Also backed by "protective covenants"

- "flow of funds" provision - determines the priority of incoming revenues

-Usually issued as callable
-No voter approval required; feasibility studies only

- No statutory debt limits
What's another name for a SPECIAL tax?

(2 names actually)
Excise taxes

Sometimes luxury taxes
What's a "protective covenant"?
A promise

Protective covenants only apply to revenue bonds.

Memory trick protective coVENant = reVENue
Overlapping debt occurs only at which level?
Local level. Overlapping debt never occurs at the state level.

It is supported by taxes (G.O.)

overlapping debt examples include:
School districts
Libraries
Park Districts
BUT NEVER AIRPORT AUTHORITIES. Airports go under Revenue bonds because of the fees.
Net Overall Debt on G.O.'s
Direct Debt + overlapping debt = Net Overall Debt
Contiguous Overlapping Debt is:
Overlapping debt that is shared by neighboring municipalities. (share a border)
A G.O. (General Obligation Bond)
is backed by what?

(2 answers, one concrete, one not)
A general obligation (G.O.) municipal bond is backed by the "full faith and credit"

Also by taxes
Revenue Bonds are:
Bonds for which the payments of principal and interest depends on specified identified sources of revenue. Such as:

Excise taxes, License fees, User charges and Lease fees

REVENUES ARE NOT BACKED BY THE TAXING POWER OF THE CITY, STATE, TOWN. REVENUE BONDS ARE NOT REPAID FROM AD-VALOREM TAXES
AD VALOREM taxes are:
Property taxes.
Local Level VS State Level Tax Chart for G.O.s
Sales and income taxes go to: State government

Real Estate Taxes go to:
Local government
A feasibility study estimates what?
It estimates costs and revenues of a project to be backed by revenue bonds. If the study finds the project to be self supporting.
Double Barreled Bond
A Revenue bond that has been reclassified as a General Obligation bond. This happens when the revenues are not sufficient to keep the facility going, but the municipality doesn't want to shut it down. The bond is now backed by Revenues and the full faith faith and credit of the municipality. THE SAFETY OF THESE BONDS ARE GREATER than revenue only bonds.
Trust Indenture of a Revenue Bond
Trust Indenture is only put together after the feasibility study is complete.

Trust Indenture describes the rights and duties of the municipality and the trustee.

- Trustee represents the BONDHOLDERS

- The indenture includes the bond's reserve fund needs and rate schedule.

- The trust document are prepared by the municipality's bond counsel

Bond Indenture / Indenture / Trust Indenture are all the same thing
Net Revenue Pledge is the good type of Flow of Funds Provision.

What is the correct order for this flow of funds? (Hint: OB's are Doctors"
Money is allocated in this order:
1) Operation and Maintenance Fund. This fund is for REGULAR maintenance.

2) Bond service account for PRINCIPAL and INTEREST

3) Debt service reserve fund and / or sinking fund

4) Reserve maintenance fund. RENEWAL AND REPLACEMENT (depreciation fund) used for the IRREGULAR maintenance of a facility
5) Surplus fund or general fund of the municipality for excess revenues
Gross Revenue Pledge is the dumb way to allocate funds because:
The first stop for funds is for the bond's principal and interest instead of keeping up the operation and maintenance of the facility. If the facility is not properly operated and maintained, it will not continue to bring in revenues.
What is "capitalized interest" or "funded interest"
Capitalized or funded interest means that a municipality will issue more debt than the project needs so it has money to pay bondholder interest during the construction phase of a project or facility. A facility can not generate revenues before it is built...
Debt service is:
payment of bond and interest principal
New Housing Authority bonds are also called what? What is special about these bonds?
New Housing Authority bonds are also called PHAs. They are considered to be the safest type of municipal bond because they are backed by the US government
Industrial Development Bonds. What are they?
Industrial Development bonds are classified as Revenue bonds. They are issued by a municipality on behalf of a corporation. This is a mutually beneficial relationship. The company won't leave and will continue to pay taxes to the municipality and also employ residents of the municipality. The company will benefit by being able to lock in lower coupon rates because the bond interest is not taxable at a federal (and most likely state and local) levels.

It is a very risky security because the burden of repaying the debt to bondholders is SOLEY shouldered by THE COMPANY, not at all by the municipality.

Substantial users (persons or companies that benefit from the bond issue) may be taxed on the interest if they buy the bonds.
Moral obligation bonds are risky or safe?

(These are Revenue bonds)
Moral obligation bonds are risky because they are issued by municipalities that are in financial difficulty. They are not legally required to interest or principal. They try, but they don't have to succeed. If they don't succeed they try to go to the state level to get funds allocated to them, but that is not 100% either.
Callable Zero Coupon Muni bonds (when called) are usually called at what?
102% of the current accreted value
Who would invest in zero coupon bonds?
People who are planning for a big future expenditure. Like college tuition for kids in ten years.
Private Activity or Private Purpose Bonds have what difference from most muni bonds?
Private activity or private purpose bonds' interest income is usually subject to full or alternative minimum preferred taxes
Refunding Bonds
Refunding Bonds are issued by the municipality and the municipality uses the money to immediately retire callable higher coupon bonds that are outstanding. This is called "straight refunding" Three reasons a municipality does this:

1) To take advantage of lower interest rates
2) To change the maturity or amortization schedule of the bonds
3) To liberalize the bonds' indenture provisions
Pre refunding and advanced refunding bonds
The municipality issues new bonds whose proceed will be used in the FUTURE to pay off existing bonds. The proceeds are invested in US GOVERNMENT SECURITIES and pledged EXCLUSIVELY to the payment of interest and and principal of the existing bond. The pledge DEFEASES the existing bond issue as part of the municipality debt limit.
Pre refunding characteristics
The existing bond will be redeemed at the earliest call date. Pre-refunding can only be done within 90 days of the call date. The call price can be more than the par value of the bond.
Advance refunding characteristics
The existing bond is generally non callable and is redeemed at the original maturity date. THe new bonds must REMAIN OUTSTANDING for MORE THAN 90 days.

Advance refunding is done to:
- Restructure a debt issue
- Remove restrictive covenants
- Reduce interest costs

BUT NOT TO
- pay expenses for the municipality
- earn profits (arbitrage) between interest rates being paid out on outstanding bonds and interest rates being earned on government securities
Commercial paper is issued by municipalities for what? but never what?
Commercial paper is issued to
1) Raise working capital
2) Cover extraordinary expenses
3) Cover construction or maintenance costs
BUT NOT TO REFUND OUTSTANDING BONDS
Only bonds are issued to refund other bonds
Who hires the reputable attorney (AKA counsel) that puts the legal opinion on the muni certificates?
The issuer hires the counsel. The municipality hires the guy who says this bond is tax exempt in the eyes of the law
A municipal bond attorney can never guarantee what?
That the principal and interest will be paid on time for a particular issue
Municipal bonds have either of two opinions:
Unqualified:
absolute and unconditional. An unqualified opinion indicates the bond is legal, valid, and binding and will be tax exempt

Qualified:
Specifies that the validity and tax exempt status are conditional in some way. This indicates something may be wrong with the bond.

AS AN INVESTOR, ALWAYS CHECK THAT THE BOND IS UNQUALIFIED
Serial bonds are sometimes quoted as
A percentage describing basis (or yield to maturity)

And sometimes have balloon maturities
Term bonds are also called
dollar bonds because dealers will quote them in dollars

Term bonds generally have sinking funds
When a partial call is made on a term bond issue, the called bonds are selected...?
Randomly
Tender Offer
Sometimes a municipality may wish to retire its debt before the maturity of the bond. If the bond is not callable, the municipality can do a tender offer. Here they OFFER to buy back the bonds usually at a premium. This is not mandatory for the bond holder
Callable muni bonds are required to be priced to the lowest of all possible yields. Or the worst case scenario. Explain.
The lower of two options is used:
Yield to maturity or Yield to call

If yield to call is less than YTM, the bond is trading at a premium
Put Bond or "Tender Option"
A bond feature that allows the holder of the put bond to redeem the bonds back to the issuer or agent usually at par on certain stated dates. This feature does NOT guarantee a customer against a loss if the bond was purchased at a premium.

An investor would exercise this feature if prices decline or yields were to rise.
Repurchase, or REPO, agreements
A security sold by a firm with the agreement to buy back the security at an AGREED UPON price.

These are usually short term.

Records must be kept for three years.
Variable Rate Muni Bonds
Have interest rates that are recalculated periodically. The interest rate adjustment is based on treasury security returns.

Holders of variable rate munis have SOME protection from interest rate risk because the rate is adjusted periodically.

You can never completely eliminate interest rate risk.
What is the lowest categorization of bonds in INVESTMENT GRADE for Standard and Poor's? How about for Moody's?
The lowest investment grade bond for S&P is BBB

The lowest investment grade bond for Moody's is Baa

BB and Ba (respectively) are below investment grade. They are in "speculative grade"
To show a relative standing within an investment grade, Standard and Poor's uses what? What does Moody's use?
S&P will use a plus or minus sign to indicate that the bond is high/low relative to other bonds within the grade. Ex. AA+ means the bond is at the top of the AA grade.

Moody's uses the number "1" following a bond of better relative standing than other bonds WITHIN ITS GRADE
Ex. AA-1 is better than AA.
MIG (Moody's investment grade) evaluate municipal notes
A "MIG 1" rating on a note is comparable to a AAA rating on a bond.
When comparing the quality of a AAA bond and a MIG 1 note, which is the more quality investment?
The MIG 1 notes is the better investment because notes have short term maturity so the MIG 1 will be rated higher than the AAA bond.
In periods of inflation, what happens?
Interest rates increase.

Prices of bonds decline.
In periods of deflation, what happens?
Interest rates decline.

Prices of Bonds appreciate.
5 ways you should diversify your muni bond portfolio:
1) geographically
2) By maturity
3) By purpose
4) By Security
5) By Quality ( credit quality)
When appraising the value of a muni bond, what is the most important factor?
When appraising the value of a muni bond, the most important factor is the market value of similar bonds
What is the purpose of MBIA and AMBAC?
These are two insurers of muni bonds. Insuring the bond allows the municipality to offer a lower coupon rate because the bond is now safer. The insurance agencies guarantee the payment of principal and interest. The munis do not do this to improve the credit rating of their bond, although it usually has that effect. But that effect of increasing the credit rating is not guaranteed to be a permanent thing. Credit ratings are based upon the financials of the issuer.
Revenue Term Bonds are often quoted at??
A bid and ask dollar price.
What is not considered when calculating the compound accreted value of a zero coupon bond?
The current market yield
5 ways you should diversify your muni bond portfolio:
1) geographically
2) By maturity
3) By purpose
4) By Security
5) By Quality ( credit quality)
When appraising the value of a muni bond, what is the most important factor?
When appraising the value of a muni bond, the most important factor is the market value of similar bonds
What is the purpose of MBIA and AMBAC?
These are two insurers of muni bonds. Insuring the bond allows the municipality to offer a lower coupon rate because the bond is now safer. The insurance agencies guarantee the payment of principal and interest. The munis do not do this to improve the credit rating of their bond, although it usually has that effect. But that effect of increasing the credit rating is not guaranteed to be a permanent thing. Credit ratings are based upon the financials of the issuer.
Revenue Term Bonds are often quoted at??
A bid and ask dollar price.
What is not considered when calculating the compound accreted value of a zero coupon bond?
The current market yield