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52 Cards in this Set

  • Front
  • Back
Municipal Debt
* 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
Federal Tax Exemptions
* 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
Private Activity Bonds
* Subject to Alternative Minimum Tax (AMT) -Ensures that wealthy folks pay taxes too.
Taxable Equivalent Yield
* 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.
Formula: Tax Equivalent Yield
Tax Equivalent Yield = Muni Yield / (100% - Tax Bracket%)
Net Yield
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.
Formula: Net Yield
Net Yield = Taxable Yield x (100% - Tax Bracket%)
Discount Bonds
if a bond si bought @ a discount in the secondary market & held to maturity, there will be a taxable gain reported as ordinary income
Original Issue Discount (OID) Bonds
* 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
Premium Bonds
* Bonds bought @ premium to par must be AMORTIZED each year.

* When bond is amortized, portion of premium is written off each year.
Bank Qualified Issues
* 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
Municipal Obligations; 3 basic types of debt
1) General Obligation Bonds

2) Revenue Bonds

3) Anticipation Notes
General Obligation Bonds
* States issue GO bonds which are secured by taxing income, sales, gasoline
Ad Volerem Taxes (Property Taxes)
* Levied on assessed value of pproperty, NOT market value

* Amount of the tax is expressed in millions
Formula: Tax Paid
Assessed Value x Million Rate
Voter Referendum
* Approval is required for GO bond, because it's the public's tax dollars that would be used to repay the debt.
Debt Statement
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
Formula: Net Overall Debt
Net Overall Debt = the Net Direct debt + Overlaping debt
Debt Per Capita
A municipalities Net Overall Debt divided by its total population
Revenue Bonds
Used to build facilities that charges somefees, i.e. tolls, airports, bridges hospitals, turnpikes, water systems
Housing Revenue Bonds
* Used to help low to moderate income families buy homes

* Proceeds to real estate developers or bolster mortgage market
Health Care Revenue Bonds
* Build Hospitals
Utility revenue bonds
* Build gov't owned electric, gas water & sewer systems
Special Assessment bonds
* Sidewalks, street lights
Transportation BOnds
* Turnpikes, bridges, airports, public transit systems.
Industrial Development Revenue & Pollution Control Revenue Bonds
* Lease agreement w/a corp
Special Tax Bonds
*Debt service is paid through proceeds froma specific tax, i.e. roads build with gasoline tax
Double Barrelled bonds
* Backed by 2 sources of revenue, usually tax dollars & project's revenue
Moral Obligation Bonds
* Bonds are secured by the revenues of a project
Public Housing & New Housing Authority BOnd
* Build low income housing, section 8 housing, NO longer issued
Analyzing Revenue Bonds
* Self supporting, economically viable
Debt Service Coverage Ratio
* Higher the ratio, the more secure the coverage
Flow of Funds
* Tells invostors in what order the revenues are to be spent.
Net Revenue Pledge
* Operating & maintenance costs are paid prior to debt service
Gross Revenue Pledge
* Debt service is paid first, less common, used most often w/health care revenue bonds.
Revenue Fund
* Operation & Maintenance Fund

* Debt Service Fund

* Debt Service Reserve Fund

* Replacement & Renewal Fund

* Sinking Fund

* Surplus Fund
Revenue Bond Covenants
* 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
Anticipation Notes
* Short term interest bearing securities

* Pay interest upon maturity

* Used in Bridge Financiing
Tax Anticipation Notes
* Usually GO Securities

* Used to finance current municipal operations

* Paid w/future taxes
Bond Anticipation Notes
* Used to financeprojects which will be paid for w/a future bond issue
Grant Anticipation Notes
* Issued w/expectations of receiving federal grant
Revenue Anticipation NOtes
* Usually GO securities

* Will be paid w/future revenues of a project
Construction loan Notes
* Used to start construction projects which will eventually be funded through a bond issue
Insuring municipal Bonds
When a bond is insured, it receives the highest credit rating from Moody's and S&P
Optional Redemption
* Issuer can call the bonds AFTER a certain date, but they have no obligation to do so.
Mandatory Redemption
* 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.
Extraordinary Optional Redemption
* If an unusual event specified in the indenture occurs, the issuer has the option to call the bonds, i.e. mortgages are prepaid
Extraordinary Mandatory Redemption
If an event in the indenture occurs, the issuer must call the bonds, i.e. earthquake, hurricane; Catastrophe Call Covenant
*New bons are issued to retrie old bonds
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
Tender Option
Allows the bond holder to "put" the bonds back to the issuer
Tender Offer
Allows the issuer to retire old debt prior to maturity. It is done w/non-callable bonds.