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33 Cards in this Set

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  • Back
issuers of municipal securities
- territorial possessions of the US
- state governments
- legally constituted taxing authorities
- trust indentures are not required for municipal bonds - enhances marketability
ad valorem taxes
- property taxes
- follow bonds issued by towns, cities, counties, license fees, fines.
statutory debt limits
- municipal government is limited by states as too how much debt they can incur
- if it issues a debt that would put it over the limit it must have voter approval
municipal tax limits
- some states limit property taxes to a percentage of property value
- rate is expressed in mills - one mill equals $1 per $1,000
coterminous debt
- two or more taxing agencies that share the same geographic boundaries and are able to issue debt separately and they end up taxing the same property
revenue bonds
- used to finance any municipal facility that generates sufficient income
- not subject to statutory debt limits or voter approval
- may be subject to an additional bonds test
sources of revenue
- utilities - water sewer and electric
- housing
- transportation
- education
- health
- industrial
- sports
types of revenue bonds
- industrial development revenue bonds - issued to construct facilities or purchase equipment
- lease rental bonds - municipality issues to finance office construction for itself or its staet or community
- special tax bonds - secured by one or more desibnate taxes other than property tax
- special assessment bonds - finance the construction of public improvements such as streets, sidewalks, or sewers
- new housing authority bonds - issued to develop and improve low income housing - backed by US government - called section 8 bonds
moral obligation bonds - if revenues or tax collections are not sufficient to pay the debt service the state has teh authority to appropriate funds to make payments
municipal anticipation notes
- short term - less than 12 month maturities
- Tans - Tax anticipation notes - finance current operations in anticipation of futrure tax receipts
- Rans - Reven anticipation notes
- Trans - Tax and revenue anticipation notes - combination of tan and ran
- ban - bond anticipation notes - eventually converted to long term funding through sale of bonds
- CLNs - construction loan notes - issued to provide interim financing for construction of housing projects-
- GAN - grant anticipation notes
official statement
- must be signed by officer of issue
- disclosure document - includes:
- offering terms
- summary statement
- purpose of issue
- authorization of bonds
- security of bonds
- description of bonds
- description of issuer
- provisions
- legal proceedings
- tax status
preliminary official statement
- discloses most of the same material of official statement with exception of interst rates and offering price
- underwriters use this to determine investors and dealers interst in the issue
legal opinion
- states that the issue is legally binding on the issuer and conforms with applicable laws
- is either a qualified opinion (may be a legal uncertainty) or unqualified opinion(issued unconditionally)
official notice of sale
- published in the bond buyer and local newspapers - includes:
- date time and place of sale
- type of bond
- bidding restrictions
- dated date
- maturity structure
- call provisions
- denominations
- expenses
- name of firm for legal opinion
- details of delivery
the bond buyer
- published every business day and serves as an authoritative source of information on primary market municipal bonds
- friday edition publishes the 30 day visible supply (the total dollar volume of municipal offering not including short term notes) and the placement ratio (the percentage of new issues sold vs new issues offered for sale the prior week)
- if the visible supply is large interest rates are likely to rise to attract investors to the larger number of bonds available - a small visible supply is an indication that interest rates are likely to fall
the bond buyer compiled indexes
- 40 bond index - daily price index of 40 GO and revenue bonds with an average maturity of 20 years - rise in index indicates bond prices are rising and yields are falling
- 20 bond index - weekly index of 20 GO bonds with 20 years to maturity rated A or better
- 11 bond index - weekly index of 11 of the 20 bonds from the 20 bond index rated AA or better
- yields on the revdex are always higher than the yields on the GO 20 bond index b/c revenue bonds have higher risk
munifacts
- a subscription wire service of the bond buyer that supplies prices, information about new issues, and general news relevant to the municipal bond market
syndicate
- an account that helps spread the risk of underwriting an issue among a number of underwriters
syndicate letter
- a way to formalize the relationship - it includes:
- level of participation of commitment
- priority of order allocation
- duration of the syndicate account
- appointment of the manager for the account
- fee for the managing underwriter and breakdown of the spread
- obligations
- they are not legally binding until the syndicate's submission of the bid
types of syndicate accounts
- wester account - divided account - each underwriter is responsible only for its own underwriting allocation
- eastern account - undivided account - each underwriter is allocated a portion of the issue
writing the scale
- the process of establishing the reoffering yield for each maturity
Net interest cost
- common calculation used for comparing bids and awarding the bond issue
- combines the amount of proceeds the issuer receives with the total coupon interst it pays
- true interest cost adjusts for the time value of money
split rate bids
- more than one interest rate
- interest is determined by the lowest average interst cost to the issuer
cover
- the difference between the winning bid on an new issue and the next best bid
- expressed in basis points or dollars per bond
- the next best bid is the cover bid
spread
- the syndicates compensation for underwriting the new issue
- the difference between the price the syndicate pays the issuer and the reoffering price
total takedown
the portion of the spread that remains after subtracting the management fee
order allocation priority
Pro Golfers Don't Miss
1) presale order - entered before the date that the syndicate wins the bid - customer willing to place an order w/o knowing final price
2) group net order - placed after bid is awarded - group customer receives priority
3) designated order - from institutions that wish to allocate the takedown to certain syndicate members
4) member order and member related order - lowest priority for orders - for a member firm as for a UIT
highest priority is given to those orders that benefit the most members
flow of funds in an et revenue pledge
- operation and maintenance - used to pay current operating expenses - remaining funds are called net revenues
- debt service account - pays interest and principal and serves as a sinking fund for term issues
- debt service reserve fund - used to hold enought money to pay one year's debt service
- reserve maintenance fund - used to supplement the general maintenance fund
- revewal and replacement fund - used to create reserve funds for major renewal projects and equipment replacements
- surplus fund - used for a variety of purposes such as redeeming bonds or paying for improvements
gross vs. net revenue pledges
- gross revenue pledge - debt service is paid frist from gross revenues
- net revenue pledge - debt service paid from the net revenues, meaning operations and maintenance costs are paid first - this is the more common of the two - equals gross revenue minus operating expenses
municipal bond quotes
- usually priced and offered for sale on YTM basis rather than dollar price - called basis quote
- a bond quoted at 104 is known as a dollar bond - dollar bonds are term maturities adn basis bonds are serial maturities
bona fide quote
- to be considered bona fide the dealer must be prepared to trade the security at the price specified in the quote
types of quotations
- bona fide quote
- workable indication - reflects a bid price at which a dealer will purchase securities from another dealer
- nominal or subject quotation - indicates a dealer's estimate of a security's market value - provided for informational purposes only
- out-firm with recall quote - quote that is firm for an hour with a five minute recall period - priveds time for the firm receiving the quote to try to sell the bonds that it does not own
tax equivalent and tax free equivalent yield formulas
Tax equivalent - Dived the municipal yield by (100% minus the investor's tax bracket)
- tax-free equivalent yield formula - multiply the corporate yield by (100% minus the investors tax bracket)
MSRB Regulations
- Banks and broker dealers must comply with regulations
- must pass the series 52 or 7 to be qualified as a municipal securities rep.
- - dealers must maintain blanket fidelity bonds as mandated by the SRO
- dealer must obtain and keep on file information about its associated persons
- written complaints must be entered into a complaint file indicating what action was taken
- syndicate must establish priority for allocating orders
- uniform practices must be met - cash trades settle on trade date - regular way trades settle on 3rd business day after the trade date - securities must be in good delivery
- can only publish quotes for bona fide bids or offers
- dealer must be examined once every 2 years to ensure compliance with MSRB
- dealers must deal fairly
- dealers must obtain prices for customers that are fair and reasonable
- firm must obtain extensive financial, personal and investment information about a client to ensure suitability
- dealers cannot give gifts valued more than 100 to any person per year except for employees
- must be truthful in advertising
- clients must be informed if a control relationship exists b/w firm and issuer
- firm must get written consent from the issuer to submit a competitive bid
- dealers may not use client information for any unauthorized sales
- dealers may not misuse securities or money held for customers
- each firm must designate a principle to supervise
- must keep copy of MSRB regulations for customer review
- copy of official statement must be given to customers at time of sale
- firms may not engage in municipal securities busines w/ an issuer for 2 years after any political contribution is made to an official of that issuer
- may not make telemarketing calls before 8 or after 9
- must establish and implement an anti money laundering compliance