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Series 7- Module 5 Municipal Securities
Terms in this set (72)
are state and local debt issues. Local issues may include those of cities, counties, or other local agencies and authorities.
construction loan note (aka project note)
are issued for the purchase and construction of property for new, low income housing projects
The rates for _____ are the lowest rates for debt securities since they are short-term, tax-free, and backed by a U.S. government agency.
pha bond (public housing authority bond)
When the project is complete, the Public Housing Authority (PHA), a government agency, issues a _____, whose proceeds will be used to pay off the construction loan note/project note.
tax anticipation note
are issued by a local agency of a municipality to generate temporary money to finance current expenses until taxes are collected.
revenue anticipation note
are issued by municipalities anticipating the receipt of future revenues
bond anticipation note
are issued by a municipality in anticipation of the issuance of a bond that has been passed for some project in the community
grant anticipation note
are issued by a municipality for a project that is being funded by a grant.
general obligation bond
are municipal bonds that are backed by the "full faith and credit" of the issuer.
Principal and interest payments are paid from the tax revenue generated by the issuing state or municipal entity.
Because the payments are made using tax revenue, the underwriter must be selected through a competitive bidding process.
have a lower risk of default than do revenue bonds; therefore, they usually have lower yields and higher ratings than revenue bonds.
ad valorem tax
Taxes imposed to raise money for GO bonds
limited tax bond
is only backed by a special tax, not the full taxing power of the issuer.
are issued to obtain funds to construct bridges, tunnels, streets and infrastructure, rapid transit, harbors, and parks.
•Principal and interest are paid from fees imposed on the users of the facility for which the bond was issued.
•A feasibility study is conducted before a ____ is issued to determine whether a project is necessary and whether it can pay for itself.
•In a specific municipality, a ____ is more risky than a GO bond, and thus has a higher coupon because the only source of payments for principal and interest is the revenues of the facility.
user fee revenue bond
Fees charged for water and sewer usage pay off this
tolls and fees bond
Fees charged for the usage of highways, toll bridges, airports, and other projects pay off this
special tax bond
are issued for specific purposes, such as building or renewing roads or rapid transit systems.
special assessment bond
are issued to generate money either to purchase specific property or to construct facilities, such as infrastructure in new housing areas, for a specific group of users.
industrial development bond
are issued by a municipality for a corporation for financing construction of such projects as pollution control facilities, industrial parks, sports stadiums, airports, or educational facilities
double barrel bond
are issued to generate funds to pay for a specific facility.
is both a revenue bond and a general obligation bond.
•The bond's interest and principal payments are first paid by the revenues generated by the users of the facility, and if those revenues are insufficient, the bond is subsequently secured by property taxes.
moral obligation bond
are paid from revenues of a facility, which is built by money from the bonds. These bonds pay for facilities that are needed in a community, state, or other district. If there are not enough revenues from the facility to pay the debt service, the local council (or state legislature) can make an annual appropriation to have the debt service covered.
build America bond
are issued by municipalities. However, the interest paid is subsidized by the U.S. government.
The greatest risk is liquidity, since there is not a large secondary market for them.
The long maturities pose yet another risk -- the solvency of the municipality that is issuing the bonds.
The interest on the bonds is subject to Federal income tax.
The money being raised by the issuers is for capital expenditures such as upgrading buildings, highways, and other infrastructures
are issued at different times, either at different dates within one year or different dates over a period of years.
mature over a number of years. When a bond is issued so that parts of the bond MATURE in different years, the bond is called a ____.
issued by corporations and municipalities, all mature at one time.
refunding the bond
is when one bond is issued to pay off another bond, commonly referred to as refinancing.
•the municipality has funded the debt over again, or "refunded" its debt.
•This is done only if the issuer can reduce its interest cost.
can be redeemed prior to maturity without being called by the issuer
During this period, the market price of the bonds is never below the PUT price, so the YIELD never exceeds the coupon.
bearer bond (aka coupon bond)
are owned by the person who holds (or bears) them.
Owners of these do not have their names registered on the books of the issuer.
the owner is registered with the issuer. All interest payments are sent to the person whose name is registered with the company
is a large document outlining of all the requirements of the issuing municipality.
are agreements made between the issuer and the purchaser of a revenue bond.
are set forth in the indenture.
ensures that the issuer will keep rates high enough to meet operation and maintenance expenses as well as debt service
is a promise by the issuer to maintain the facility in good working order and to keep it in good repair so as to maintain revenues.
revenues pledge covenant
is a promise by the issuer on how the money received in revenues is to be paid.
The items paid first and second are outlined in the flow of funds, and depend on the type of pledge.
is the fund into which all revenues must first be deposited at the time they are received by the issuer.
net revenue pledge
If the fund contains this, payments made from the revenue fund must first be used to meet the ongoing expenses of the project. (These payments are made to the operation and maintenance fund.)
gross revenue pledge
If the fund contains a GROSS REVENUES PLEDGE, payments made from the revenue fund must first be used to pay the principal and interest (debt service) on the bond. (These payments are made to the debt service fund.)
is a fund that must be set up for term bonds only, and is money the issuer must regularly set aside for eventually redeeming its bonds, as specified in the indenture.
Term bonds must have this since the whole bond comes due at one time.
legal opinion (by a bond counsel)
states that the bond is a municipal bond as determined by existing local and tax laws and that the interest is exempt from federal and state (if applicable) taxes.
In making its opinion, the bond counsel:
•Researches the state and local laws to check into the requirements for a bond to have tax-exempt status
•May assist in getting favorable legislation passed in the locality, if necessary
•Supplies information to the underwriters for the official statement
muni securities rulemaking (MSRB)
regulates the actions of underwriters, broker/dealers, and the people who sell municipal bonds.
notice of sale
an advertisement by a municipality to prospective underwriters wherein the municipality requests that bids be submitted on the cost of underwriting a new issue. This type of advertisement is only used in connection with a competitive underwriting.
is an advertisement by the underwriters to prospective buyers.
may only include very basic information regarding the new issue.
the issuer advertises for underwriters to submit bids on the cost of underwriting the issue.
the issuer asks a broker/dealer with which the issuer has an established working relationship to submit a cost estimate for underwriting the issue.
discloses all the important aspects of the bond, the issuer, and the protections for the buyer.
•This also includes any call features.
Any issue being sold for the second time or more
broker/dealers who buy the bonds from investors wanting to sell and then resell them to investors wanting to buy.
index has an average rating of AA+.
index has an average rating of BBB.
index has an average rating of AA.
a wire service for secondary trading, with some underwriters watching it.
is run by the Bond Buyer and provides a great deal of information regarding new issues of municipal bonds in both the primary and the secondary markets. It gives information about the issuer, the indenture, and any information for analyzing the ratings and quality of the issues. There are no prices or yields.
a term that describes trading between BOND TRADERS.
•Never acts as a market maker
•Helps dealers find a particular bond they are looking for
•Helps institutional firms buy and sell bonds
•Helps large buyers and/or sellers remain anonymous
•Only acts in a broker capacity
•Never acts in a principal transaction even when buying bonds to help municipal firms fill an institution's order.
muni bond quote
When making a quote for a municipal bond, each basis point is equal to 1/100 of 1%, or .0001.
•Thus, a bond quoted at a 7.85 basis is actually selling on a 7.85% yield to maturity.
•A rise of three basis points (3 BiPs) raises this quote to 7.88%.
•A rise of 12 BiPs raises the original quote to 7.97%.
•A rise of 113 BiPs raises the original quote to 8.98%.
is a quote given by dealers when they are ready or able to do business at a specified price.
are given for informational purposes only.
•They can be given at any time on any type of bond -- general obligation or revenue.
• is given when the dealer is not committed to doing business at that price.
inverted yield curve
has higher interest rates in the early maturities and lower interest rates in the later years.
nominal yield curve
has lower interest rates in the early maturities and higher interest rates in the later years
flat yield curve
has all the maturities equal, or with very little increase
When an issuer fails to make an interest payment, the bonds are considered to be in ______ and trade without accrued interest.
in whole call
usually callable in the first years at a premium that reduces to par after three to five years -- initiated when refunding or advance refunding has occurred
usually callable in the first years at a premium that reduces to par after three to five years -- initiated when the issuer has extra money due to more revenues than expected
usually callable in the first years at a premium that reduces to par after three to five years -- initiated when advance refunding has occurred, but the issuer prefers to keep the money in U.S. government bonds that are paying the issuer more interest than the municipality is paying the bond holders
sinking fund call
usually callable in the first years at a premium that reduces to par after three to five years -- initiated in term bonds when the issuer has extra money due to more revenues than expected or in serial bonds that have a term-maturity as well
always callable at par-- initiated when there is leftover money from the bond issue and the project is complete
always callable at par -- initiated when there is leftover money from the bond issue and the project is completed, or when the facility that was financed with the bond proceeds can no longer be used, due to a catastrophe such as fire or earthquake or other such disaster, or if taken by eminent domain.
notice of redemption
if issuers wish to call a bond, they must give __________ at least 30 days in advance and must publish the intent to call the bonds in a national financial publication (e.g., The Wall Street Journal). The process for calling a bond is outlined in its indenture.
is a general obligation bond indebtedness that is shared by two taxing entities and benefits both areas.
net direct debt (no overlapping debt)
NET DIRECT DEBT = (OLD DEBT + NEWLY PROPOSED DEBT) / CITY POPULATION
net debt (has overlapping debt)
NET DEBT = (OLD DEBT + OVERLAPPING DEBT + NEWLY PROPOSED DEBT) / CITY POPULATION
gross revenue pledge
TOTAL REVENUES / DEBT SERVICE
net revenue pledge
(TOTAL REVENUES - MAINTENANCE) / DEBT SERVICE
taxable bond yield
MUNICIPAL BOND YIELD / (100% - TAX BRACKET %)
are used for various reasons:
•To produce a loss to offset a gain for the year
•To produce a gain to offset a loss for the year
•To increase or change the quality of a portfolio
•To increase income for a portfolio
An investment company that pools the money of thousands of investors and buys a collection of investments that may include stocks, bonds, and other financial assets
When reporting suspected Fraud a loan originator should report this information to what agency?
what state do you live in?
According to the textbook, high-volume banking is required to make efficient use of automation and other technological innovations.
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