Series 7 (Part 2 / Ch. 8)

Front 1

Municipal bonds

Back 1

securities that state govs, local govs, or U.S. territories issue, uses money to fund and support projects such as roads, sewer systems, hospitals

Front 2

Characteristics of GO bonds

Back 2

they fund non-revenue producing facilities, fund projects (like schools, libraries, police departments) that don't bring in enough (or any) money to pay off the bonds, backed by credit (taxing power) or municipality, taxes of the people living in the municipality back the bonds, require voter approval, same people whose taxes back the bonds have the right to vote on the project

Front 3

Analyzing marketability of GO bonds

Back 3

Quality (credit rating), maturity (shorter the more marketable), call features (callable are less marketable), interest (coupon) rate (higher is better), block size (larger the better), dollar price (lower the better), issuer's name (good reputation is better), sinking fund (if yes then better), insurance (if yes then better, considered a credit enhancement)

Front 4

Net overall debt

Back 4

includes debt municipality owes directly + portion of overlapping debt that the municipality is responsible for

Front 5

Net direct debt

Back 5

debt the municipality obtained on its own, comes from GO bonds and short-term municipal notes, does not include revenue bonds because they are self-supporting

Front 6

Overlapping debt

Back 6

occurs when several authorities in a geographic area have the ability to tax the same residents

Ex. have to pay Summit County, Hudson, Ohio

Front 7

Calculating debt per capita (per person)

Back 7

take the debt (overall, direct, or overlapping) and divide it by the number of people in the municipality, lower the better for the investor

Front 8

What is the driving force behind paying back investors for GO bonds?

Back 8

property taxes (collected by municipalities not states) and sales taxes, also helped by traffic fines and licensing fees

Front 9

Property values

Back 9

ad valorem (property) taxes are the largest source of backing for GO bonds, people living in the municipality want their properties values to be low (for tax purposes) but people invested in municipal bonds want property values to be high, higher the value the higher the collected tax value.....calculating ad valorem taxes use assessed value, not market value.....calculated in mills, thousandths of a dollar (1 mill = 0.001)

*mills has two l's and two zeros after decimal point

assessed value x mills x 0.001 = prop. value

Front 10

Population

Back 10

more people that live there and pay taxes the better, population trend is important-moving in better than moving out

Front 11

Tax base

Back 11

number of people living in the municipality, assessed property values, and how much the average person makes, larger the better

Front 12

Sales per capita

Back 12

amount of sales per capita (amount of goods the average person buys) is important

Front 13

Traffic fines and licensing fees

Back 13

fees paid for speeding tickets and getting licenses goes to paying off municipalities debt in GO bonds

Front 14

Revenue bonds

Back 14

issued to fund municipality facilities that will generate enough income to support the bonds such as certain utilities, toll roads, airports ,hospitals, student loans

Front 15

Industrial development revenue bonds (IDR's)

Back 15

AKA: private activity bonds (PAB's) used to finance the construction of a facility for a corporation that moves into that municipality, even though a municipality issues IDR's, they're actually backed by lease payments made by a corporation, credit rating is derived from the corporation, riskiest of municipal bonds, may not be federally tax free, investors subject to alternative minimum tax (AMT)

Front 16

Characteristics of revenue bonds

Back 16

they don't need voter approval, require a feasibility study to estimate revenues of the projected facility to ensure it will be able to pay off the debt from the bond

Front 17

covenant

Back 17

promises that protect the investors by holding the issuer legally accountable

Apply to revenue bonds

Front 18

additional bonds test

Back 18

says that if the municipality is going to issue more bonds backed by the same project, it must prove that the revenues are sufficient to cover all of the bonds

Front 19

open-ended indenture on initial bonds

Back 19

additional bonds will have equal claims to the assets

Front 20

close-ended indenture on initial bonds

Back 20

any bonds issued are subordinate (rank lower than) the original issue

Front 21

Rate of covenant

Back 21

promises the municipality will charge sufficient fees to people using the facility to be able to pay expenses and the debt service (principal and interest on the bonds)

Front 22

Maintenance covenant

Back 22

promises the municipality will take care of the facility and any equipment so the facility continues to earn revenue

Front 23

Insurance covenant

Back 23

promises the municipality will insure the facility

Front 24

catastrophe clause

Back 24

if a facility is destroyed due to a catastrophic event like a flood/hurricane, municipality will use the insurance to call the bonds and pay back bondholders

Front 25

flow of funds

Back 25

operation and maintenances, debt service (bond interest), debt service reserve (backup to pay bonds), reserve maintenance fund (backup to pay operation cost), renewal and replacement fund, surplus fund

Front 26

net revenue pledge

Back 26

if municipality pays operation and maintenance first

Front 27

gross revenue pledge

Back 27

if municipality pays debt service first

Front 28

debt service coverage ratio

Back 28

indication of the ability of the municipality to meet the debt service payments, the higher the better

debt service coverage ratio = (net or gross revenues) / (principal + interest)

Front 29

Special tax bonds

Back 29

secured by one or more taxes other than valorem (property) taxes, may be backed by sales tax on fuel, tobacco, alcohol, etc.

Front 30

Special assessment (special district) bonds

Back 30

issued to fund the construction of sidewalks, sewers, streets etc. backed by taxes only on the properties that benefit from the improvements

Ex. if people down the road get new sidewalks, they get taxed, not you

Front 31

Double-barreled bonds

Back 31

a combination of revenue and GO bonds, issued to fund revenue-producing facilities (toll bridges, water and sewer facilities, etc.) but if the revenues aren't enough to pay off the bonds, tax revenues are used to supplement

Front 32

Limited-tax general obligation bonds (LTGO's)

Back 32

type of general obligation bonds which the taxes backing the bonds are limited, secure by all the revenues of the municipality that aren't used to back other bonds, the amount of property taxes that municipalities can levy to back these bonds is limited

Front 33

Public housing authority bonds (PHA's)

Back 33

AKA: new housing authority bonds (NHA's) issued by local housing authorities to build and improve low-income housing, backed by U.S. gov subsidies, and of the issuer can't pay off the debt the U.S. gov takes up any shortfalls

safest municipal bond

Front 34

Moral obligation bonds

Back 34

issued by a municipality but backed by pledge from state gov to pay off the debt if the municipality can't, need legislative approval to issue, considered safe, the state has a moral responsibility - but not legal - to help pay off the debt if municipality can't

Front 35

What do municipalities issue when they need short term (interim) financing?

Back 35

Municipal notes, used to bring in revenue until other revenues are received, typical maturity is one year or less (3-5 months)

Front 36

Tax anticipation notes (TAN's)

Back 36

provide financing for current operations in anticipation of future taxes that the municipality will collect

Front 37

Revenue anticipation notes (RAN's)

Back 37

provide financing for current operations in anticipation of future revenues that the municipality will collect

Front 38

Tax and revenue anticipation notes (TRAN's)

Back 38

combo of TAN's and RAN's

Front 39

Grant anticipation notes (GAN's)

Back 39

provide interim financing while the municipality waits for a grant from the U.S. gov, paid off by grant funds received

Front 40

Bond anticipation notes (BAN's)

Back 40

bonds provide interim financing while waiting for long-term bonds to be issued

Front 41

Construction loan notes (CLN's)

Back 41

provide interim financing for the construction of multifamily apartment buildings

Front 42

Project notes (PN's)

Back 42

provide interim financing for the building of subsidized housing for low-income financing

Front 43

Tax-exempt commercial paper

Back 43

issued by organizations such as universities w/ permission of the gov., debt obligation usually lasts only a few months to help the organization cover its short-term obligations

Front 44

AON (all or none)

Back 44

an order qualifier (fill the entire order at that price or not at all) or type of underwriting, not a municipal note, no matter how much it looks like one

Front 45

Municipal note ratings

Back 45

Moody's: MIG 1, MIG 2, MIG 3, MIG 4

Standard and Poor's: SP-1, SP-2, SP-3

Fitch: F-1, F-2, F-3

Front 46

Is there a tax on municipal notes?

Back 46

Municipal notes are federally tax free and therefore typically have lower yields than U.S. gov. bonds even though U.S. bonds are considered the safestt

Front 47

taxable equivalent yield (TEY)

Back 47

tells you what the interest rate of a municipal bond would be if it weren't federally tax-free so as to compare to the taxed corporate bonds

TEY = (municipal yield) / (100% - investor's tax bracket)

Front 48

municipal equivalent yield (MEY)

Back 48

the yield on a taxable bond after paying taxes

MEY = (municipal yield) x (100% - investor's tax bracket)

Front 49

Which bonds are triple-tax free? (interest is exempt from federal, state, and local taxes)

Back 49

U.S. territories and federal districts

Ex. Puerto Rice, Guam, U.S. Virgin Islands, American Samoa, Washington D.C.

Front 50

Which type of municipal bonds are issued triple tax-free?

Back 50

Bonds issued and bought in the same state

*don't assume a bond is triple-tax free unless stated on the test*

Front 51

Does the tax advantage apply to the interest and sale of bonds?

Back 51

Only interest, if bonds are sold for more than the purchased value there are taxes on the capital gains

Front 52

90-day apprenticeship period

Back 52

new registered reps can't engage any municipal securities business with public for 1st 90 days in the industry, may only deal with security professionals such as dealers and may not receive commission, applies only to municipal bonds, can still receive commissions from selling other types of securities

Front 53

Confirmations - given/sent to customer before or at the completion of the transaction (settlement date) settle the regular way in three days after trade date

Back 53

Included on confirmations: broker-dealers name/address/phone #, capacity of trade (firm acted as broker or dealer), dollar amount of commission (if firm acting as broker), customer's name, issuer's name, interest rate, maturity, call features, trade date/time/settlement date, CUSIP ID #, bond yield, dollar price, accrued interest, registration form (principal, book, fully registered), called or pre-refunded, any unusual facts

Front 54

Advertising and record keeping

Back 54

brokerage firm must keep all advertising for at least three years and they must be easily accessible, required to be accurate and true

Front 55

Gifts

Back 55

municipal securities can't give gifts over $100 per year to customers, prevent bribery, business expenses are exempt

Ex. pay for plane ticket to meet customer = okay

pay for plane ticket to Bahamas = bad

Front 56

Commissions

Back 56

no specific maximum guideline, but they must be fair and reasonable, and can't discriminate among customers

Front 57

bond resolution (indenture)

Back 57

provides investors w/ contract terms, not required by law but most municipalities publish one with the bond issue

Front 58

Legal opinion

Back 58

printed on municipal bond certificates, prepared and signed by municipal bond counsel (attorney), verifies that the issue is legally binding on the issuer and conforms to tax laws

Front 59

Broker's broker

Back 59

a broker for brokers, specialize in trading municipal bonds with institutional customers (banks and municipal brokers) instead of public customers, help municipal dealer sell unsold portions of municipal bond issues

Front 60

ex- legal stamped bond

Back 60

does not contain a legal opinion

Front 61

Qualified legal opinion

Back 61

bond counsel has some reservations about the issue

*think of qualified as bad

Front 62

Unqualified legal opinion

Back 62

bond counsel is issuing a legal opinion w/o reservations

*think of unqualified as good

Front 63

Official statement

Back 63

municipal bonds don't have a prospectus, official statement instead, come in preliminary and final versions, what funds will be used for, how repaid and other details

Front 64

Bond Buyer

Back 64

online publication that provides info on municipal issues including municipality bond indexes

Other municipal bond sources include: Thomson Muni Market Monitor, newspapers, dealer offering sheets, EMMA (Electronic Municipal Market Access)

Front 65

For Further Review (Part 2 / Ch. 8)

Back 65

pgs. 109-110