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75 Cards in this Set

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Revenue bonds include all of the following characteristics
1) They usually contain a higher interest rate than general
2)Interest payments do not deplete the general revenues of the issuing municipality
3)They are secured by the user charges
Debt Limit is:
The legal maximum debt incurring power of the issuer
A limited tax general obligation is best described in this way
The issuer's taxing power is limited to a prescribed maximum rate.
In a steadily rising interest rate market, municipalities in need of capital will issue:
Long term bonds
Current Yield
Annual Interest / Current Value
A municipal bond pays interest on Jan 1 and July 1st. If a customer purchases the municipal bond settlement on July 31, how many days of accured interest will he pay?
30
The action prohibited by a closed-end provision in a bond indenture is:
Additional borrowing against the revenue source
Taxable Equivalent
1) It is dependent on the tax bracket of the purchaser
2)It is the reciprocal of the current yield
Flow of funds
The priority of revenues allocated to debt services, operating expenses, maintenance expenses, and reserves
How are Bond Revenues backed
1) Set up so that users should pay for the project or facility
2) They are subject to an earnings requirement
3)These bonds usually present greater investment risk than double barrel bonds
5, 10, 20 year municipal bonds. If the municipal bond market yields move down 20 basis points,
The 20-year bonds will have the greatest rise in price
Difference in annual yield on $15,000 in 6.5% municipal bond versus 6.3% municipal bond
15,000 x .065 = 975
15,000 x .063 = 945
=30
A municipal bond indenture stipulates that funds be set aside for equipment repairs and replacement in the
Operation and maintenance funds
Regular way municipal bond trade is performed on Tuesday October 12. Interest payment dates for the bond are April 15 and October 15.
1) Settlement occurs on the interest payment date
2)No accrued interest need be paid by the buyer
*Interest starts on settlement day for the buyer
Municipal bonds with call features
1) Bonds can be called in a strong (declining interest rate) market, forcing investors to reinvest at a lower rate
2)The premium, if any, generally does not compensate for the loss of investment return in the bonds are called
3) Bonds will generally be called when the issuer can refund the issue at lower interest rates
Insures municipal bonds
MBIA
General Obligation Bond
Municipal government makes periodic payments to the authority to provide for the issue's debt service. Payments are made from direct taxes collected by the municipality
Bond Buyer's Revenue Bond Index
The average yield of 25 specific revenue bonds with 30-year maturities
Reasons to call a revenue bond
1) Facility destroyed by fire
2)Interest rates are declining
3)Funds are available in the surplus account to call the bonds
Bonds with different issue dates but secured by the same assets
Series Bonds
While a awaiting the in-flow of funds from a bonds issue a municipality might issue
BANs ( Bond Anticipation Notes)
Most Municipal bonds have a minimum denomination of
$5000
What is a Moral Obligation Bond
Municipal bond issued with a covenant that, if revenue collections are not sufficient to meet debt service requirement, the state legislature has the authority, but not the obligation to appropriate funds necessary to meet payments.
6% Municipal Bond yielding 6.5%. 28% Tax Bracket
What is the tax equivalent yield
YTM / 100% - Tax Bracket
6.5% / 100% - 28%
=9.03
What are Double Barrel bonds
Bonds payable from project revenues and the taxing power of the issuer
Who is least likely to include municipal bonds in their portfolio
Doctor in a 39.6% Tax Bracket

*Tax equivalent yield
* YTM / 100% - Tax bracket
*Taxable income will increase
Revenue Bonds
1) Bonds can be issued for any public purpose such as water, sewer, and toll road projects
2) The bonds may not be issued once the legal debt limit of the municipality has been reached
Marketabiliy of Municipal Bonds
1)Municipal bonds are considered to be second only to US Government securities in terms of safety and high quality.
If a municipal bond decreases in price, its yield to maturity will
Increase

* Interest and Yield Increase as price decreases
Your customer is concerned about maintaining his capital investment and avoiding market risk.
Rank from most appropriate to least appropriate
Project notes
Intermediate Bonds
Long Term AA rated GO bonds
Long Term BAA Revenue Bonds
Municipal Revenue Bonds
1)Principal and interest is payable from income received from users of the system
2)When earnings are insufficient to make principal and interest payments promptly;debt service reserve can be used
3)Interest is exempt from federal income tax
Why are Municipal Bonds so popular?
1)Customers in higher tax brackets realize greater advantage with municipal bonds over fully taxable bonds
2)Federal and State income tax rates have continued to rise
3)The Tax Reform Act of 1986 eliminated most tax shelters available to individual investors.
Tax generally associated with GO ( General Obligation Bonds)
Real property Tax
Tax equivalent yield for an investor in a 28% tax bracket purchasing 10% Muni Bonds due in 10 yrs on a 9% Yield
9.0% / 100 - 28% = 12.5%
The federal tax exempt status of municipal bonds originated from the doctrine of mutual tax reciprocity. This doctrine was made effective by
The US Supreme Court
What would occur if the tax exempt status of Municipal bonds was eliminated?
Interst Yield on municipal bonds would rise
Reason for a bond not be be rated?
Issuer's debt is relatively small
Responsibility of municipal bond counsel
1)Examining individual bonds to be sure that the serial numbers and signatures are valid
2)Ensuring that Teasry arbitrage regulation are being followed
3)Reviewing the closing documents and transcript of all proceedings
Rank
Designated orders
Pre-Sale orders
Group orders
Members orders at the takedown
Pre-sale orders
Group orders
Designated orders
Member orders at the takedown
What is contained in official notice of sale
Offering Yields
Ability to service debt
Bond Rating

*Ask yourself what does underwriter need to know?
Analyzing credit situation of municipal bonds should include
1)Deficit funding
2)Decline in property value
3)An increase in tax delingquencies
Included in official notice of sale
1) The time and the date of the sale
2) The requirement of good faith deposit
3)Name of approving attorney
Warning signs of declining credit situation
1) Rapid increase in debt outstanding
2)Current operating deficits increasing
3) Increasing levels of unfunded pension liabilities
3)
Undivided Syndicate -20% in total issue of $40,000,000. What is dealer percentage share in net syndicate profit of account?
20%
Legal opinions on municipal bonds
1)Operations Department at EJ ensures that every primary and secondary issue that is maintained in our municipal bond inventory has a legal opinion.
2)Legal opinions include information about principal maturities and bond numbers
3)They must include assurance that proceeds are used for the stated purpose
Good faith deposits include
1) Returned to unsuccessful bidders
2)Forfeited if the underwriter fails to perfom under the terms of the bid
3)Applied to payment for new issues on settlement
The manager of the municipal bond syndicate is best described by
1) The dealer who directs all of the underwriting groups activities
A municipal syndicate is offering a 6.5% bond issue to the public at 100. The syndicate manager is allowing a 1/4 point selling concession and a 3/4 point takedown. A member of the syndicate sells $2,000 of bonds. The profit accuring to the syndicate member is
1500
If the managers of a new municipal issue have been appointed by the issuer to purchase and market the bonds, this is known as a
Negotiated issue
The priority schedule used to determine the allocation of new municipal securities is described in the
Syndicate Letter
In describing high grade or AAA rated municipals the term "safe" means
Interest and principal will be paid on time
Official statement
Document prepared by the issuer for distribution to dealers and customers
In preparing a bid on a new municipal issue, the first factor to be considered by the syndicate would be
The scale on the new issue
Feasibility study on a stadium, you should be concerned with:
1)Population in the project area
2)Competition with other stadiums
The printed statement regarding a municipal bond that concludes with "...the bonds are valid adn binding obligation fo this municipality is furnished by..."
An independent law firm
The spread on a competitive bid new issue municipal underwriting is the difference between
Syndicate bid and re-offering yields
The agreement among underwriters is
1) Appointment of Syndicate manager
2) Establishment of the concession
3) Establishement of the takedown
Important factors to consider in the municipal bond swap
1) Capital gain or loss
2)Annual coupon income
3) Time to maturity
Valid reasons for an investor to swap securities are
1) Establish a loss to affect capital gains or income
2) Improve marketablity of holdings
3)Gain an increased amount current income, and increased yield to maturity, or both
A municipal trader participating in a joint account with another municipal trader may
1) Sell all the bonds regardless of his liability
2) Effect a transaction for a related portfolio
3)Purchase bonds for an accumulation account
Municipal broker's brokers
1) Perform trades for dealer banks
2) Perform trades for other municipal broker / dealers
Municipal securities dealer XYZ has taken a block of bonds firm for one hour without recall from dealer ABC. Which of the following regarding the understanding between the two dealers are true
1) XYZ controls the bonds for one hour
2)ABC may not alter the price for one hour.
Maurice and Gordon are bond traders. Maurice has taken a block of bonds firm from Gordon for one hour with a five minute recall.
1)Gordon is permitted to show his bonds to other prospected buyers as long as he indicated that these bonds are out firm and subject to recall
2)Gordon is permitted to recall his bonds at any time, but he must give Maurice an option to buy for five minutes.
3)Maurice has the first call on Gordon's bonds for one hour
In the securities industry " concessions means
1)The portion of the takedown that compensates a dealer who is not a member of the syndicate
2)The portion of the sydicate profit that compensates a dealer who sells bonds for another account
3)The dollar amount of the discount from list offered by one dealer to another in the secondary market
An investor owns $100,000 of 6% municipal bonds in a margin account. For federal tax purposes, the interest income would be
0
A customer purchases 25 municipal bonds in Jan 95 in the secondary market maturing in 10s at 96. Five years later, he sells the bonds at 101. The capital gains for tax purposes would be
750
A customer purchases a 6%, $1000 municipal bond maturing in 10 years at 105. After four years the un-amortized premium would be
30

* $50 to be amortized
*10 yrs to maturity
*$50/10 = $5
* 4 yrs x $5 = $20
* $50 - $20 = $30
A $10,000 municipal bond with a 10-year maturity is purchased in the secondary market at 110. The bond is sold four years later for 107. What is the taxable loss or gain
$100 gain

*Par $10,000
*Purchase Price 11,000
*Sold after 4 Yrs 11,700
*400 for 4 years
* 11,000 - 400 = 10600
*10,700 - 10,600 = 100 gain
Municipal bond tax rules
1) The premium paid on municipal bonds, if held to maruty, does not qualify as a tax deduction
2) A profit on the sale of municipal bonds is taxable
3)Interest on all municipal bonds is exempt from state income tax
A municipal bond is bought at a discount from par in the primary market. The bond is later sold at a profit prior to maturity.
The capital gain would be equal to teh sellign price minus the cost basis.
Upon liquidation and distribution, assest are claimed in which order
Taxes
Wages
Secured
Unsecured (General Creditors)
Bonds
Preferred
Common
Convertible bonds are most frequently issued in
A falling market
The main purpose of ADRs is to
Stimulate American investment in foreign countries
A pre-emptive right is the right to
Maintain proportionate ownership
The funtion of the registrar is to
Ensure that proper issue and transfer procedures are followed; they do so by certifying