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69 Cards in this Set
- Front
- Back
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Interest income on munis is exempt because of what? Who applied this?
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Reciprocal Immunity.
It was applied by the U.S. Supreme Court |
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Most munis are not taxed on state interest when?
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When the muni bond is issued within the state.
However, most muni holders have to pay state taxes when the muni bond was issued from another state |
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Which territory is "triple exempt?" Exempt from fed, state, and local taxes?
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Puerto Rico
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Corporate Equivalent Yield
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Municipal yield /
100% - [investors tax rate] = corporate equivalent yield |
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Current Yield
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Annual Interest / Market Price
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What is amortization?
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Amortization is when you buy a bond at a premium and you take the premium amount divided by the years to maturity. Each year you take that amount off of what you paid for it on your taxes (this is your cost basis).
If you hold the muni to maturity, you have no tax liability Muni's must use amortization. Corporate bonds can be amortized or the full premium amount can be taken as a loss in full at maturity |
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What is an OID? What's it mean?
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Original Issue Discount
If an investor buys a bond at a discount in an original offering, they can treat the discount as part of INTEREST INCOME and tax will be exempt |
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What's a secondary market discount?
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When an investor buys a muni bond at a discount in the secondary market. The discount is treated as ordinary income and is fully taxable in the year the bonds are sold.
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What are SWAPS? What do SWAPS allow investors to do?
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SWAPS are exchanging one bond for another. Investors will do this towards the end of the year when they realize that they have a lot of capital gains. They will then look for their muni bonds that are trading at a loss. They will take that loss to offset the capital gains. They take the loss by selling their muni bonds and buying others.
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Reasons to do a muni bond swap:
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-Upgrade a portfolio by switching to a higher rated bond
-Extend or shorten time to maturity -Increase income or yield -REALIZE CAPITAL LOSSES to offset capital gains *ACCRUED INTEREST IS NEVER A REASON TO INVEST IN ANY BOND |
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Charitable Institutions, IRA's, and Pension funds don't invest in muni bonds for what reason?
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They are already tax exempt or deferred.
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What is the name of the daily newspaper that talks about NEW ISSUES of municipal bonds?
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"The Bond Buyer"
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The placement ratio from "The Bond Buyer" :
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Tells the percentage of new issues that have been sold compared to those available
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The 30 Day Visible Supply from "The Bond Buyer" tells us what?
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Measures the total number of new issues coming to the market in the next thirty days. Two sections: Issues of General Obligation and Revenue bonds to be sold on a competitive basis. AND issues of GO's and Revenue Bonds to be sold on a negotiated basis.
IMPORTANT: Issues of municipal NOTES are not included! |
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Bond Buyer Index is what?
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an index of 20 GO's each with 20 year maturities published by "The Bond Buyer" newspaper. It is a good indicator to buyers of the yield they would earn if they purchased a similar bond.
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The Bond Buyer's REVENUE BOND Index is what?
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Also published by the newspaper, "The Bond Buyer". It is the average yield of 30 specific REVENUE BONDS each with 30 year maturities.
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Underwriter is another word for what?
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Syndicate
There is managing underwriter and selling syndicates which are under a managing underwriter |
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Associate the term scale with what type of bond?
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Serial Bond
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Associate the term pricing with what type of bond?
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Term Bond
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MSRB is what?
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The municipal securities rule making board.
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Negotiated deals are used for what kind of bonds?
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Negotiated deals are used on Revenue Bonds. This is where an issuer goes to an underwriter of their choosing
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Competitive bidding is used for which kind of bond?
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Competitive bidding is used on General Obligations. Competitive bidding must be used on GO's because tax money must get the best bang for it's buck. Competitive bidding is when an issuer lets brokerages and commercial banks bid on the underwriting of a General Obligation Bond. The lowest Net Interest Cost is chosen.
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An Underwriting Agreement is:
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Spells out the terms and interest costs of the offering. It is made by the issuer (municipality) and the Managing Underwriter.
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Net Interest Cost is
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The total interest cost minus any premium over par that is received when the bond is sold.
NIC is the amount of interest the issuer will end up paying on the bond issue. The issuer chooses the managing underwriter for a GO based upon the lowest NIC - Net Interest Cost. Issuers are also interest in knowing the true interest cost because it considers the time value of money whereas NIC does not consider time value of money. |
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The Official Notice of Sale from an issuer to competitive bidders for a new muni bond issue states all of these:
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-MATURITY DATES AND CALL FEATURES
-AMOUNT OF GOOD FAITH DEPOSIT REQUIRED FROM BIDDERS -The date & time bids are to be received -Details of the bond issue -Redemption Features -Interest rate and bidding dtails -Paying agent -Purpose of new bonds -Legality of the issue -Where the bonds are to be delivered -Cusip or other ID number to be printed on the bonds |
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Good faith deposit for new issue
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Usually about 2% of overall value of the new issue.
The bidders that don't win will get their good faith deposit check within two days. The winner will have their check locked up in a safe deposit box - NOT CASHED. It is returned when the issue is sold. GOOD FAITH DEPOSITS ARE NOT CONSIDERED TO BE A SYNDICATE EXPENSE! |
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The official notice of sale also includes -
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the right to reject any bid and may waive any irregularities in a bid.
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The Official Notice of Sale will NOT include:
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-The bond's rating
-Any statement of guarantee of debt service -OFFERING YIELDS -BOND YEARS (Bond Years is actually a formula to determine the offering yields) -RECORD OF TAX COLLECTIONS FOR A MUNICIPALITY -LEGAL OPINION - printed on bond, but not in notice of sale |
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Who gets to select the bond counsel??
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THE ISSUER!
NOT THE MANAGING UNDERWRITER |
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Bid form for competitive (GO) bidding is:
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A document included with the notice of sale that is sent to bidders. WHen executed (SIGNED BY AN AUTHORIZED PERSON OF THE ISSUER) , the bid form becomes the contract between issuer and managing underwriter.
It includes coupon rates, maturities, and a signature of the submitting bidder. IT DOES NOT INCLUDE LEGAL OPINIONS |
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Bid forms are used when?
Underwriting agreements are used when? |
Bid forms are used for competitive bidding (GO bond)
Underwriting agreements are used for negotiated underwriting (Revenue Bond) |
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The managing underwriter is best described as?
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The dealer that directs all of the underwriting group's (selling syndicates + managing underwriter) activities
The manager determines the size of all the members' participation |
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Syndicate letter:
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BEFORE a potential managing underwriter submits its bid it will send out a syndicate letter to all selling syndicates that it intends to use.
Once the potential underwriter receives enough responses from potential selling syndicates saying they're interested in being a part of this, THEN THE POTENTIAL MANAGING UNDERWRITER WILL SUBMIT THEIR BID. |
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Syndicate letters usually contain:
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-The duration of the underwriting
-The member's commitment (eg. 10% of issue -A statement to the effect that the syndicate does not constitute a legal partnership -A vote of the majority of syndicate members will determine the bid and offering prices (note: at the final pricing meeting of the syndicate, dissenting members MAY drop out of the syndicate) -A "carte blanche" given to the manager to act with "customary authority and discretion" - acting on behalf of the entire group -Priority or allocation schedule (what orders are going to be executed 1st, 2nd, 3rd, etc) - A syndicate manager MAY VIOLATE THE TERMS OF THE SYNDICATE LETTER IF it benefits the entire syndicate account |
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Eastern versus Western Account Agreements
Eastern Account Agreements |
Eastern Account Agreements are called UNDIVIDED AGREEMENTS. All the syndicate members share everything. Bond Allocation, financial responsibility, financial liability. "It's like Tina's small Eastern town. Everyone knows everyone and helps everyone."
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Eastern versus Western Account Agreements
Western Account Agreements |
Western Account Agreements is called a DIVIDED account. The responsibility is divided and you don't help your neighbor. The responsibility is "severally but not jointly"
Think of Tina moving to California on the West Coast. You don't know or help your neighbor and you don't care. |
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The price of a new issue is determined on what kind of worksheets and who completes them?
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The price of a new issue is determined by the underwriter using Bond Buyer worksheets.
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What's another name for the syndicate letter and again, what is the syndicate letter?
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Another name for the Syndicate Letter is the Agreement Among Underwriters. The Agreement Among Underwriters is the letter sent by the potential managing underwriter to the potential selling syndicate partners.
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Index Card for Allocation Procedures. Bonds are allocated by the Managing Underwriter in this order
Pretty Girls Demand More |
1) Pre-sale Orders
2) Group Net Account or Syndicate Account 3) Designated Orders 4) Members' Orders at Take Down |
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A Managing Underwriter must disclose the allocation of the new issue to customers upon request. How would that look?
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The Managing Underwriter would tell the customer the % of the issue that was filled at each level and the number of orders that were ahead of that customer when the last bond was sold.
Ex. 98% Pre-sale 2% Group Net Account w/ customer's order 10th in line when all bonds had been sold. |
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Take Down and Concessions:
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Syndicates get to purchase the bonds at offering price - discount = takedown from the manager. Then they sell for offering price and keep the takedown as profit. If they sell to an outside B/D, they'll sell for offering price - a concession (smaller portion of the takedown. The outside B/D will sell at offering price and keep the concession.
Concession example = .5 pts or $5.00 per $1,000 par Total Takedown example = 1.5 pts or $15.00 per 1,000 par Takedown = Offering price - takedown discount (the concession is a piece of the takedown) 1 point = 1.5 pts - .5 pts Concession can also be called "reallowance" Any remaining profit is split among the syndicate members after the manager's expenses are covered. |
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Municipal Bonds don't have prospectus - They have what?
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(OS) Official Statement
But it is not required It's provided by the Issuer NOT the Syndicate |
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The Official Statement Characteristics
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Can be called an (OS)
Is equivalent to a prospectus Is issued by the Issuer, NOT the Syndicate, but it is NOT REQUIRED. If it is issued, it must be issued to all customers and any Broker / Dealer that asks for it. The OS is exempt from the registration requirements of the '33 act. If the OS is not ready at the confirmation of the sale, a preliminary version must be sent to customers. The OS would include the purpose for the bond issue Redemption Provisions A description of the issue BUT NOT TAXABLE EQUIVALENT YIELDS |
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An accumulation account is...?
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An account established by the sponsor of a new UIT to hold bonds which will be put into the portfolio when it is formally created
All accumulation account orders (buys) must be designated as such at the time of the order |
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What is debt service coverage (otherwise known as earning coverage)?
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Debt service coverage is
Municipalities revenues / annual interest and principal pmts How many times your revenues can cover your yearly debts |
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What can be said about risk and debt service coverage?
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The lower the debt service coverage, the lower the price of the bond and the higher the yield. Because the the degree of risk rises as the coverage goes down. This is because the low coverage means the less likely an issuer can pay it's debt off.
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CUSIP NUMBER
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Only mandated in 1983
Standard identifying number |
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Dated Date
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Is the day for the new bond issue from which interest begins to accrue.
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Debt limit
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The legal maximum debt incurring power of issuer (statutory limits on GO bonds only)
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Debt Service
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The series of payments including principal and interest calculated to extinguish a debt over a specified time.
INTEREST + PRINCIPAL |
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Level Debt Service
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The combined annual payments of principal and interest are approximately equal
- only occur on serial bonds. |
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Municipal Dealer Joint Account
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2 or more firms that buy and resell a block of bonds in the SECONDARY market
Joint accounts may: -Buy bonds for an accumulation account -Sell bonds -Effect transactions for a related portfolio -Bid on bonds on behalf of customers A dealer cannot provide a different quote to customers than the other joint dealer A dealer in a joint account can not bid on new issues. We are concerned only with the secondary market here. |
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Self-Liquidating Revenue Bonds
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The project financed generates funds to retire its bonds
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Spread
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In munis is the difference between syndicate cost, average offering price, and proceeds paid to the issuer.
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Yield
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In munis, this means yield to maturity (YTM) or basis
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When the muni bond is trading at par these yields will all be the same
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Nominal yield, current yield, and yield to maturity
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Trader
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A bond trader buys and sells bonds as a dealer for its own account in the secondary market
Dealer and trader are the same. |
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Muni bonds are almost always traded what way in the secondary market?
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Principal.
Not agent. |
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It doesn't matter who the trade is with, if a muni bond is being traded it is likely
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traded principal
not agent |
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A municipal securities "dealer" or trader does what three things?
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A) controls their inventory "positions"
B) Provides appraisals C) Provides quotes |
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When a NOMINAL quote is given by a dealer, what's that mean?
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There is no commitment involved with receiving this quote. Dealer doesn't have to sell the investor the bond at this price.
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Because of the thin market, a quote given on a muni bond by a muni security dealer would not necessarily what?
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The quote would not necessarily represent the best bid or offer in the market. The offer has to be relevant to the entire market, but not spot on exact.
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A firm can borrow bonds from another firm for a short period of time (hours) to see if a customer is interested. Talk about this.
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The borrowing fund will borrow the funds for a set amount of time at a set "firm" price. The borrower can buy those bonds at any time during that borrowing period of time.
If the parties agree to a recall, then the lending firm can cancel the transaction with a small amount of time's notice. For example, the duration of borrowing is set for two hours with a five minute recall. The lending firm can cancel the deal at any time with five minutes notice. In those five minutes the borrowing firm must "FILL OR KILL" that deal meaning they must buy the bonds or the deal ends in five minutes. The borrowing firm doesn't actually have to buy the bonds, they could sell the bonds to ANY CUSTOMER OR INSTITUTION (not just the original target) without first bringing the bonds into their inventory. But the borrower has the option to just buy the bonds into its own inventory. |
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From a seller's standpoint talk about how blocksize affects marketability and liquiditiy.
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Large blocks ARE more marketable than small blocks. $100,000 par value is considered a "round lot." Large blocks provide the highest unit dollar price to sellers because less concession is taken on the trade.
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What are the most marketable - muni bonds sold at a discount, par, or at a premium?
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Muni Bonds at par are most marketable because people don't like to mess with amortization of premium or tax consequence of the discount muni bonds
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A broker's broker makes a business out of what?
Name the three things they provide. Name 5 things a broker's broker does NOT do |
Keeping track of other brokers' inventories and matching buying brokers to brokers with that security.
1) Trade for and with other Broker/ Dealers and banks. 2) Provide confidentiality and anonymity 3) Provide a wider exposure for the bonds DO NOT 1) maintain their own inventory 2) do not deal with the public 3) do not deal with the primary market 4) Do not charge COMMISSIONS 5) do not require sellers to sell the entire lot of bonds in inventory Say a customer calls Merrill Lynch looking for a muni. ML does not have the bond so they pick up the phone and call a broker's broker. The BB will find the bond, buy it, increase the price and sell it to ML. ML will dip the bond into their inventory for just a second, then take it out, mark it up, and sell it to the customer. |
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Can muni bond dealers take a short position on muni bonds?
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Yes, but they normally do not.
They don't because the market is so thin that when it is time to cover they can't find the bond they need. |
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The market price of a muni bond may fluctuate based on changes in (3 items):
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-Tax legislation
-Credit ratings -Market conditions |
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Commissions, Mark - ups, and mark - downs are charged between which two parties?
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(for exam purposes)
Broker/Dealers and public customers only Broker's brokers do not charge commissions or markups BB's do not term their price increases as mark ups |
