All of the following are true of revenue bonds, EXCEPT:
a. Revenue bonds can be issued without voter approval
b. Revenue bonds can be issued even though local debt limits have been reached
c. Revenue bonds usually pay lower rates of interest than general obligation bonds
d. Revenue bond interest is exempt from federal income taxes
a. Revenue bonds can be issued without voter approval
b. Revenue bonds can be issued even though local debt limits have been reached
c. Revenue bonds usually pay lower rates of interest than general obligation bonds
d. Revenue bond interest is exempt from federal income taxes
C
All of the choices listed regarding revenue bonds are true except the statement indicating revenue bonds usually pay lower rates of interest than general obligation bonds. This is generally not true because revenue bonds, which are backed by the earning power of the facility issuing the bonds, are riskier than general obligation bonds and usually have higher coupon rates.
All of the choices listed regarding revenue bonds are true except the statement indicating revenue bonds usually pay lower rates of interest than general obligation bonds. This is generally not true because revenue bonds, which are backed by the earning power of the facility issuing the bonds, are riskier than general obligation bonds and usually have higher coupon rates.
For a competitive offering of municipal securities, an issuer's right to reject any and all bids received will normally be contained in the:
a. Official Statement
b. Notice of Sale
c. Underwriting Agreement
d. Legal Opinion
a. Official Statement
b. Notice of Sale
c. Underwriting Agreement
d. Legal Opinion
B
The Notice of Sale for a municipal bond offering will normally contain a provision stating that the issuer retains the right to reject any and all bids if it is considered to be in its best interest to do so. This is done to protect the issuer from being obligated to accept an unsuitable bid.
The Notice of Sale for a municipal bond offering will normally contain a provision stating that the issuer retains the right to reject any and all bids if it is considered to be in its best interest to do so. This is done to protect the issuer from being obligated to accept an unsuitable bid.
Salem County has issued industrial development revenue bonds for the benefit of the Mohawk Carpeting Company. In evaluating the credit quality of these bonds, an investor should look at:
a. The bank balances of the Salem County Industrial Revenue Authority
b. The tax collection ratio of Salem County
c. The revenue stream of Mohawk Carpeting that will be committed to meet the lease payment obligation to Salem County
d. The yield differential between Salem County GOs and Mohawk Carpeting debentures
a. The bank balances of the Salem County Industrial Revenue Authority
b. The tax collection ratio of Salem County
c. The revenue stream of Mohawk Carpeting that will be committed to meet the lease payment obligation to Salem County
d. The yield differential between Salem County GOs and Mohawk Carpeting debentures
C
The security backing the industrial development revenue bond is the lease payment made by the corporation. An investor must assess whether Mohawk Carpeting can meet this obligation by generating sufficient revenues from its primary business.
The security backing the industrial development revenue bond is the lease payment made by the corporation. An investor must assess whether Mohawk Carpeting can meet this obligation by generating sufficient revenues from its primary business.
The debt of other districts which the residents of a particular municipal district may be responsible for is called:
a. Funded debt
b. Floating debt
c. Overlapping debt
d. Unsecured debt
a. Funded debt
b. Floating debt
c. Overlapping debt
d. Unsecured debt
C
The debt of other districts which the residents of a particular municipal district may be responsible for is called overlapping debt.
The debt of other districts which the residents of a particular municipal district may be responsible for is called overlapping debt.
The MSRB does all of the following, EXCEPT:
a. Regulate municipal securities dealers
b. Regulate municipal securities representatives
c. Regulate municipal securities advertising
d. Set fixed commissions for municipal dealer agency transactions
a. Regulate municipal securities dealers
b. Regulate municipal securities representatives
c. Regulate municipal securities advertising
d. Set fixed commissions for municipal dealer agency transactions
D
The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be "fair and reasonable" and negotiated between buyer and seller.
The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be "fair and reasonable" and negotiated between buyer and seller.
An analysis of the quality of a general obligation bond to be issued would include all of the following, EXCEPT:
a. The tax base of the community
b. The economic character of the community
c. The dollar denominations of the bonds to be issued
d. The makeup of the population of the community
a. The tax base of the community
b. The economic character of the community
c. The dollar denominations of the bonds to be issued
d. The makeup of the population of the community
C
An analysis of the quality of a general obligation bond to be issued would include all of the following except the dollar denominations of the bonds to be issued.
An analysis of the quality of a general obligation bond to be issued would include all of the following except the dollar denominations of the bonds to be issued.
The manager of a new issue municipal syndicate wants to allocate securities in a different manner than specified in the syndicate agreement. He may do this if he:
a. Notifies the SEC
b. Amends the syndicate agreement
c. Is prepared to justify the change to the syndicate members
d. Assumes any losses incurred by the syndicate members
a. Notifies the SEC
b. Amends the syndicate agreement
c. Is prepared to justify the change to the syndicate members
d. Assumes any losses incurred by the syndicate members
C
The syndicate manager is permitted to change the priority of orders if in his opinion it is in the syndicate's best interest. He must be able to justify the change to the syndicate members.
The syndicate manager is permitted to change the priority of orders if in his opinion it is in the syndicate's best interest. He must be able to justify the change to the syndicate members.
An increase in personal income tax rates would MOST likely result in an increased demand for:
a. Municipal securities
b. AAA-rated-corporate bonds
c. Mortgage-backed securities
d. Treasury bonds
a. Municipal securities
b. AAA-rated-corporate bonds
c. Mortgage-backed securities
d. Treasury bonds
A
An increase in personal income taxes would result in more investor demand for municipal bonds. This is because the interest income is exempt from federal income taxes.
An increase in personal income taxes would result in more investor demand for municipal bonds. This is because the interest income is exempt from federal income taxes.
According to MSRB rules, which of the following items must be disclosed to a customer in a negotiated sale of municipal bonds?
I. The amount of the underwriting spread
II. The initial offering of each maturity
III. Any fee received as agent for the issuer
IV. The name of the underwriter's counsel
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, III, and IV
I. The amount of the underwriting spread
II. The initial offering of each maturity
III. Any fee received as agent for the issuer
IV. The name of the underwriter's counsel
a. I and II only
b. II and IV only
c. I, II, and III only
d. I, II, III, and IV
C
According to the MSRB rules, in a negotiated sale of municipal bonds, the customer must be informed of the amount of the underwriting spread, the initial offering of each maturity, and any fee received as agent for the issuer.
According to the MSRB rules, in a negotiated sale of municipal bonds, the customer must be informed of the amount of the underwriting spread, the initial offering of each maturity, and any fee received as agent for the issuer.
On a municipal revenue issue, money put aside for the betterment and improvement of the facility would be placed in the:
a. Sinking fund
b. Renewal and replacement fund
c. Operating and maintenance fund
d. Debt service fund
a. Sinking fund
b. Renewal and replacement fund
c. Operating and maintenance fund
d. Debt service fund
B
The renewal and replacement fund holds monies put aside for the improvement of the facility.
The renewal and replacement fund holds monies put aside for the improvement of the facility.
A person hired by a municipal dealer must be registered:
a. Within 90 days of his date of hire
b. Within 90 days of the end of the apprenticeship period
c. Before effecting a transaction with a customer
d. Before effecting a transaction with another dealer
a. Within 90 days of his date of hire
b. Within 90 days of the end of the apprenticeship period
c. Before effecting a transaction with a customer
d. Before effecting a transaction with another dealer
C
A person must qualify as a municipal representative prior to effecting a transaction with a customer. To become qualified, the individual must pass a qualifying exam and serve a 90 day apprenticeship. There is no requirement that the person be registered in a specific time period after hire, however, the person may only act as an apprentice for a maximum of 180 days.
A person must qualify as a municipal representative prior to effecting a transaction with a customer. To become qualified, the individual must pass a qualifying exam and serve a 90 day apprenticeship. There is no requirement that the person be registered in a specific time period after hire, however, the person may only act as an apprentice for a maximum of 180 days.
A syndicate is formed on an Eastern Account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is:
a. Not liable to sell any of the unsold bonds
b. Liable to sell 10% of the unsold bonds
c. Liable to sell $1,000,000 of the unsold bonds
d. Liable to sell all of the unsold bonds
a. Not liable to sell any of the unsold bonds
b. Liable to sell 10% of the unsold bonds
c. Liable to sell $1,000,000 of the unsold bonds
d. Liable to sell all of the unsold bonds
B
In an Eastern or undivided account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is responsible for 10% of the unsold bonds.
In an Eastern or undivided account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is responsible for 10% of the unsold bonds.
A legal opinion issued by a municipal bond attorney will state all of the following, EXCEPT:
a. Interest is exempt from federal income taxes
b. Information about maturities, coupon rates, and call features if the bond is callable
c. A statement that the bond constitutes a legal and binding debt of the issuing municipality
d. A guarantee by the bond attorney that the interest will be paid when due
a. Interest is exempt from federal income taxes
b. Information about maturities, coupon rates, and call features if the bond is callable
c. A statement that the bond constitutes a legal and binding debt of the issuing municipality
d. A guarantee by the bond attorney that the interest will be paid when due
D
A legal opinion will state all of the items listed except a guarantee by the bond attorney that the interest will be paid when due.
A legal opinion will state all of the items listed except a guarantee by the bond attorney that the interest will be paid when due.
The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period of time is called the:
a. Working capital ratio
b. Dividend payout ratio
c. Debt service coverage ratio
d. Price-earnings ratio
a. Working capital ratio
b. Dividend payout ratio
c. Debt service coverage ratio
d. Price-earnings ratio
C
The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period of time is called the debt service coverage.
The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period of time is called the debt service coverage.
An investor is in the 28% tax bracket. Which of the following investments would afford him the best after-tax yield?
a. A 5% municipal bond
b. A 5 3/4% corporate bond
c. A 6 1/2% yankee bond
d. A 6 3/4% convertible bond
a. A 5% municipal bond
b. A 5 3/4% corporate bond
c. A 6 1/2% yankee bond
d. A 6 3/4% convertible bond
A
The 5% municipal bond would offer the best after-tax yield because the interest income is completely free from federal income taxes. The other investments are types of corporate debt subject to federal income taxes and 28% of the income received would be taxable. The taxable equivalent yield of the 5% municipal bond is 6.94%. This is calculated by dividing the 5% municipal yield by the complement of the tax bracket which is 72%. The result is greater than the other choices.
The 5% municipal bond would offer the best after-tax yield because the interest income is completely free from federal income taxes. The other investments are types of corporate debt subject to federal income taxes and 28% of the income received would be taxable. The taxable equivalent yield of the 5% municipal bond is 6.94%. This is calculated by dividing the 5% municipal yield by the complement of the tax bracket which is 72%. The result is greater than the other choices.
All of the following statements are true regarding an official statement for a new issue of municipal securities, EXCEPT:
a. Issuers do not have to make an official statement available
b. If one is prepared, an official statement must be filed with the SEC prior to the offering
c. An official statement provides purchasers of the new issue with detailed financial information about the issue
d. If an official statement is prepared, MSRB rules require that it be sent out to customers at or prior to settlement date
a. Issuers do not have to make an official statement available
b. If one is prepared, an official statement must be filed with the SEC prior to the offering
c. An official statement provides purchasers of the new issue with detailed financial information about the issue
d. If an official statement is prepared, MSRB rules require that it be sent out to customers at or prior to settlement date
B
Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933. They cannot be required to prepare an Official Statement by the SEC, MSRB, or any other regulatory body. If one is prepared, it does not have to be filed with any regulatory body. The issuer will usually provide an official statement because the underwriting syndicate wishes to provide information to prospective investors and thereby help market the issue.
Municipal issuers are exempt from the full disclosure and prospectus requirements of the Securities Act of 1933. They cannot be required to prepare an Official Statement by the SEC, MSRB, or any other regulatory body. If one is prepared, it does not have to be filed with any regulatory body. The issuer will usually provide an official statement because the underwriting syndicate wishes to provide information to prospective investors and thereby help market the issue.
For secondary market transactions, a municipal securities broker-dealer may use a broker's broker to:
I. Disseminate the availability of the securities
II. Sell securities but remain anonymous
III. Increase the price of the securities
IV. Guarantee a profit on a trade
a. I and II only
b. I and III only
c. I, II, and III only
d. II, III, and IV only
I. Disseminate the availability of the securities
II. Sell securities but remain anonymous
III. Increase the price of the securities
IV. Guarantee a profit on a trade
a. I and II only
b. I and III only
c. I, II, and III only
d. II, III, and IV only
A
A municipal securities broker-dealer may use a broker's broker to help sell bonds. Using a broker's broker will allow for good exposure to the market for the bonds. The broker's broker also keeps the identity of its client confidential. A broker's broker does not divulge the contra party's name to the buyer or seller.
A municipal securities broker-dealer may use a broker's broker to help sell bonds. Using a broker's broker will allow for good exposure to the market for the bonds. The broker's broker also keeps the identity of its client confidential. A broker's broker does not divulge the contra party's name to the buyer or seller.
If general obligation bonds are to be analyzed, the credit analysis would be affected by which TWO of the following factors?
I. Feasibility studies
II. The tax collection record of the municipality
III. Debt Service Ratio
IV. Evaluation of the debt to real estate values in the municipality
a. I and II
b. I and III
c. II and III
d. II and IV
I. Feasibility studies
II. The tax collection record of the municipality
III. Debt Service Ratio
IV. Evaluation of the debt to real estate values in the municipality
a. I and II
b. I and III
c. II and III
d. II and IV
D
The tax collection record and the debt to real estate value ratios are two factors that would be considered when analyzing general obligation bonds. The tax collection record informs the analyst of the tax bases being used by the municipality as a comparison of prior years tax bases and against other municipalities. The debt to real estate value ratios help the analyst study the relationship of debt to real estate valuation of the municipality and the municipality's ability to meet its debt compared with the real estate wealth of the municipality. Choices (I) and (III) apply to revenue bonds and would not be considered when analyzing general obligation bonds.
The tax collection record and the debt to real estate value ratios are two factors that would be considered when analyzing general obligation bonds. The tax collection record informs the analyst of the tax bases being used by the municipality as a comparison of prior years tax bases and against other municipalities. The debt to real estate value ratios help the analyst study the relationship of debt to real estate valuation of the municipality and the municipality's ability to meet its debt compared with the real estate wealth of the municipality. Choices (I) and (III) apply to revenue bonds and would not be considered when analyzing general obligation bonds.
What is meant by 4.50% less 3/4 for a municipal bond selling in the secondary market?
a. $1,000 bond at 4.50 yield - $0.75
b. $1,000 bond at 4.50 yield - $7.50
c. $5,000 bond at 4.50 yield - $0.75
d. $5,000 bond at 4.50 yield - $7.75
a. $1,000 bond at 4.50 yield - $0.75
b. $1,000 bond at 4.50 yield - $7.50
c. $5,000 bond at 4.50 yield - $0.75
d. $5,000 bond at 4.50 yield - $7.75
B
Quotes for serial municipal bonds are usually per $1,000 and on a yield-to-maturity basis. The "less 3/4" represents the concession or discount offered to another dealer. 3/4 point = $7.50.
Quotes for serial municipal bonds are usually per $1,000 and on a yield-to-maturity basis. The "less 3/4" represents the concession or discount offered to another dealer. 3/4 point = $7.50.
The interest from bonds issued by U.S. territories, possessions, and the Commonwealth of Puerto Rico is exempt from:
I. Local tax
II. State tax
III. Federal tax
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
I. Local tax
II. State tax
III. Federal tax
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
D
The interest income received from bonds issued by U.S. territories, possessions, and the Commonwealth of Puerto Rico is exempt from all levels of taxation. These bonds are termed "triple-tax exempt".
TRIPLE-TAX EXEMPT
Municipal bonds in which the bondholder pays no federal, state, or local taxes on the interest. In general, bonds issued by possessions and territories of the U.S. (e.g., Puerto Rico) are triple-tax exempt.
The interest income received from bonds issued by U.S. territories, possessions, and the Commonwealth of Puerto Rico is exempt from all levels of taxation. These bonds are termed "triple-tax exempt".
TRIPLE-TAX EXEMPT
Municipal bonds in which the bondholder pays no federal, state, or local taxes on the interest. In general, bonds issued by possessions and territories of the U.S. (e.g., Puerto Rico) are triple-tax exempt.
When considering the credit strength of a municipal issuer, one should include in the analysis:
I. The condition of the local economy
II. The current financial status of the municipality
III. Money supply figures
IV. The general capability of the fiscal officers of the municipality
a. I and II only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV
I. The condition of the local economy
II. The current financial status of the municipality
III. Money supply figures
IV. The general capability of the fiscal officers of the municipality
a. I and II only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV
C
The state of the local economy is an important factor in determining a municipality's credit worthiness. For example, communities at different stages of growth may require more or less debt and this must be understood in the analysis. The current financial status is also important to determine the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supplyfigures which are published by the Federal Reserve Board are irrelevant with regard to the credit strength of a municipality.
The state of the local economy is an important factor in determining a municipality's credit worthiness. For example, communities at different stages of growth may require more or less debt and this must be understood in the analysis. The current financial status is also important to determine the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supplyfigures which are published by the Federal Reserve Board are irrelevant with regard to the credit strength of a municipality.
The managing underwriter of a new municipal issue has an obligation to provide:
I. An "Official Statement" to other dealers upon request
II. An "Official Statement" to all purchasers of the issue
III. The names of the syndicate members to all purchasers of the issue
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
I. An "Official Statement" to other dealers upon request
II. An "Official Statement" to all purchasers of the issue
III. The names of the syndicate members to all purchasers of the issue
a. I and II only
b. I and III only
c. II and III only
d. I, II, and III
A
The managing underwriter of a new municipal issue has an obligation to provide an "Official Statement" to other dealers upon request and to all purchasers of the issue. The managing underwriter does not have to provide the names of the syndicate members to all purchasers of the issue. The Official Statement is a voluntary document which need not be created by the issuer. However, if created, the above rules apply.
The managing underwriter of a new municipal issue has an obligation to provide an "Official Statement" to other dealers upon request and to all purchasers of the issue. The managing underwriter does not have to provide the names of the syndicate members to all purchasers of the issue. The Official Statement is a voluntary document which need not be created by the issuer. However, if created, the above rules apply.
A municipality borrowing for a short-term period to finance a capital project would issue:
a. Commercial paper
b. Tax anticipation notes
c. Debentures
d. Bond anticipation notes
a. Commercial paper
b. Tax anticipation notes
c. Debentures
d. Bond anticipation notes
D
A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
Which of the following types of securities may a municipal securities representative sell?
I. Municipal bonds
II. Government bonds
III. Corporate bonds
IV. Municipal unit investment trusts
a. I only
b. I and III only
c. I and IV only
d. I, II, III, and IV
I. Municipal bonds
II. Government bonds
III. Corporate bonds
IV. Municipal unit investment trusts
a. I only
b. I and III only
c. I and IV only
d. I, II, III, and IV
A
A municipal securities representative may sell municipal bonds. The municipal securities representative, according to the MSRB, is not properly licensed to sell government bonds, municipal unit investment trusts, or any type of corporate securities.
A municipal securities representative may sell municipal bonds. The municipal securities representative, according to the MSRB, is not properly licensed to sell government bonds, municipal unit investment trusts, or any type of corporate securities.
An individual purchases $100,000 face value of a 6% municipal bond at a dollar price of 96 1/2. The bond's maturity is 7-1-17, but the issue has been called for redemption on 7-1-08 @ 100. The customer's confirmation should show the:
I. Yield-to-call
II. Yield-to-maturity
III. Taxable equivalent yield
IV. After-tax yield
a. I only
b. II only
c. I and III only
d. II and IV only
I. Yield-to-call
II. Yield-to-maturity
III. Taxable equivalent yield
IV. After-tax yield
a. I only
b. II only
c. I and III only
d. II and IV only
A
Since the bond has been called, the yield to call must be shown because the maturity is no longer of importance. Taxable equivalent yield and after tax yield are never shown since the investor's tax bracket and/or capital gains rate cannot be accurately predicted.
Since the bond has been called, the yield to call must be shown because the maturity is no longer of importance. Taxable equivalent yield and after tax yield are never shown since the investor's tax bracket and/or capital gains rate cannot be accurately predicted.
A syndicate manager in the sale of a new municipal bond issue would normally allocate bonds in which of the following orders of priority?
I. Member orders
II. Orders for the benefit of the syndicate account
III. Designated orders
a. I, II, and III
b. III, II, and I
c. II, III, and I
d. III, I, and II
I. Member orders
II. Orders for the benefit of the syndicate account
III. Designated orders
a. I, II, and III
b. III, II, and I
c. II, III, and I
d. III, I, and II
C
Orders for bonds are usually allocated in the following order of priorities:
1. Pre-sale orders
2. Syndicate (group account) net, which are orders at a net price for the members of the account on a pro-rata basis
3. Designated orders
4. Member orders
In this question, pre-sale orders, which is the first priority, is not mentioned. The next priority would be orders for the benefit of the account (syndicate), designated orders, and individual member orders.
Orders for bonds are usually allocated in the following order of priorities:
1. Pre-sale orders
2. Syndicate (group account) net, which are orders at a net price for the members of the account on a pro-rata basis
3. Designated orders
4. Member orders
In this question, pre-sale orders, which is the first priority, is not mentioned. The next priority would be orders for the benefit of the account (syndicate), designated orders, and individual member orders.
An employee of a municipal securities firm would like to open an account with another municipal securities firm. All of the following statements regarding the employee and the account are TRUE, EXCEPT:
a. The employer must receive duplicate copies of all transactions made in the account
b. The employer must be notified about the opening of the account
c. The employer must be notified in writing of the employee's intention to open the account
d. The employer must approve each transaction before the execution of the transaction
a. The employer must receive duplicate copies of all transactions made in the account
b. The employer must be notified about the opening of the account
c. The employer must be notified in writing of the employee's intention to open the account
d. The employer must approve each transaction before the execution of the transaction
D
All of the statements listed regarding the employee and the account are true except the employer must approve each transaction before the execution of the transaction. This statement is not true because prior approval is not required.
All of the statements listed regarding the employee and the account are true except the employer must approve each transaction before the execution of the transaction. This statement is not true because prior approval is not required.
The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:
a. Covered bonds
b. Safe bonds
c. Guaranteed bonds
d. Pre-refunded bonds
a. Covered bonds
b. Safe bonds
c. Guaranteed bonds
d. Pre-refunded bonds
D
The outstanding bonds are called pre-refunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow at lower rates and therefore save interest costs.
The outstanding bonds are called pre-refunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow at lower rates and therefore save interest costs.
A MIG rating applies to a:
a. Convertible bond
b. Pre-refunded utility bond
c. ADR
d. BAN
a. Convertible bond
b. Pre-refunded utility bond
c. ADR
d. BAN
D
MIG (Moody's Investment Grade) ratings apply to municipal notes. A BAN (Bond Anticipation Note) is the only municipal note given.
MIG (Moody's Investment Grade) ratings apply to municipal notes. A BAN (Bond Anticipation Note) is the only municipal note given.
Interest earned on which of the following would be added to income when calculating the alternative minimum tax?
a. Limited tax bonds
b. School bonds
c. Private activity bonds
d. Public housing bonds
a. Limited tax bonds
b. School bonds
c. Private activity bonds
d. Public housing bonds
C
The computation of the alternative minimum tax involves adding tax preference items back to a taxpayer's income. In some cases, interest earned on a private activity bond may be considered a tax preference item. A private activity bond, also called an AMT bond, is a municipal bond with 10% or more of the proceeds generated from the bond going to a project financed by a private entity (e.g., a corporation).
The computation of the alternative minimum tax involves adding tax preference items back to a taxpayer's income. In some cases, interest earned on a private activity bond may be considered a tax preference item. A private activity bond, also called an AMT bond, is a municipal bond with 10% or more of the proceeds generated from the bond going to a project financed by a private entity (e.g., a corporation).
All of the following are taken into consideration when determining the markup on a municipal securities transaction, EXCEPT:
a. The dollar amount of the trade
b. The best judgment of the dealer
c. The fact that the dealer is entitled to make a profit
d. The financial condition of the customer
a. The dollar amount of the trade
b. The best judgment of the dealer
c. The fact that the dealer is entitled to make a profit
d. The financial condition of the customer
D
All of the choices given must be taken into consideration except the financial condition of the customer.
All of the choices given must be taken into consideration except the financial condition of the customer.
The document used in detailing the terms of a municipal syndicate is called the:
a. Offering Notice
b. Bond Buyer New Issue Worksheet
c. Syndicate Agreement
d. Official Notice of Sale
a. Offering Notice
b. Bond Buyer New Issue Worksheet
c. Syndicate Agreement
d. Official Notice of Sale
C
A syndicate is a group of dealers formed to bid on a new issue. The syndicate is formed by means of a syndicate letter (syndicate agreement) which will explain how the syndicate will operate.
A syndicate is a group of dealers formed to bid on a new issue. The syndicate is formed by means of a syndicate letter (syndicate agreement) which will explain how the syndicate will operate.
An investor in the 28% tax bracket can buy a 5.10% tax-free municipal bond at par. What yield would the investor need in a taxable corporate bond to receive the same after-tax yield in the municipal bond?
a. 6.90%
b. 7.08%
c. 7.80%
d. 10.22%
a. 6.90%
b. 7.08%
c. 7.80%
d. 10.22%
B
If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield = Equivalent Taxable Yield divided by 100% - investor's tax bracket The customer is in the 28% tax bracket. The municipal bond has a 5.10% coupon rate and since it is purchased at par, the yield is also 5.10%. 5.10% (municipal bond yield) divided be 72% (100% - 28%) = 7.08% (Equivalent Taxable Yield) If the individual was to buy the 7.08% corporate bond, the tax liability for the interest received would be $19.82 ($70.80 interest income x 28% tax bracket = $19.82 tax liability). This would give the investor an after-tax return of $50.98 which is the same return he could receive if he purchased the 5.10% ($51.00) municipal bond.
If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield = Equivalent Taxable Yield divided by 100% - investor's tax bracket The customer is in the 28% tax bracket. The municipal bond has a 5.10% coupon rate and since it is purchased at par, the yield is also 5.10%. 5.10% (municipal bond yield) divided be 72% (100% - 28%) = 7.08% (Equivalent Taxable Yield) If the individual was to buy the 7.08% corporate bond, the tax liability for the interest received would be $19.82 ($70.80 interest income x 28% tax bracket = $19.82 tax liability). This would give the investor an after-tax return of $50.98 which is the same return he could receive if he purchased the 5.10% ($51.00) municipal bond.
A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond.
What amount will the issuer receive?
a. $991.25 per bond for a total of $49,562,500
b. $990.00 per bond for a total of $49,500,000
c. $985.00 per bond for a total of $49,250,000
d. $1,000.00 per bond for a total of $50,000,000
What amount will the issuer receive?
a. $991.25 per bond for a total of $49,562,500
b. $990.00 per bond for a total of $49,500,000
c. $985.00 per bond for a total of $49,250,000
d. $1,000.00 per bond for a total of $50,000,000
B
In a new municipal bond offering, the underwriting syndicate assumes risk and is therefore entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and therefore make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager's fee plus $3.75 to the syndicate for risk plus $5.00 profit for sale of bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).
In a new municipal bond offering, the underwriting syndicate assumes risk and is therefore entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and therefore make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager's fee plus $3.75 to the syndicate for risk plus $5.00 profit for sale of bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond.
When the issue is completely sold, the managing underwriter's fee will total:
a. $160,000
b. $260,000
c. $60,000
d. $600,000
When the issue is completely sold, the managing underwriter's fee will total:
a. $160,000
b. $260,000
c. $60,000
d. $600,000
C
The syndicate manager receives $1.50 for every bond. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond).
The syndicate manager receives $1.50 for every bond. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond).
A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond.
Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for their risk on selling group sales.
a. $2.50 per bond for a total of $50,000
b. $2.50 per bond for a total of $100,000
c. $4.00 per bond for a total of $80,000
d. $4.00 per bond for a total of $160,000
Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for their risk on selling group sales.
a. $2.50 per bond for a total of $50,000
b. $2.50 per bond for a total of $100,000
c. $4.00 per bond for a total of $80,000
d. $4.00 per bond for a total of $160,000
A
The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for their risk on those bonds ($2.50 per bond on 20,000 bonds).
The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for their risk on those bonds ($2.50 per bond on 20,000 bonds).
According to MSRB rules, each broker-dealer engaging in municipal securities activities must have a municipal securities principal to promptly review and/or approve in writing:
I. Each customer account for trading in municipal securities
II. Every transaction for municipal securities
III. All written customer complaints
IV. All advertising and other written correspondence pertaining to municipal securities activities
a. III and IV only
b. I and II only
c. I, III, and IV only
d. I, II, III, and IV
I. Each customer account for trading in municipal securities
II. Every transaction for municipal securities
III. All written customer complaints
IV. All advertising and other written correspondence pertaining to municipal securities activities
a. III and IV only
b. I and II only
c. I, III, and IV only
d. I, II, III, and IV
D
A municipal securities principal is responsible for supervising activities relating to municipal securities transactions. Included in his responsibilities are the review and/or approval of all the choices given.
A municipal securities principal is responsible for supervising activities relating to municipal securities transactions. Included in his responsibilities are the review and/or approval of all the choices given.
In a municipal bond underwriting, the difference between what the issuer receives and the production is known as the:
a. Manager's fee
b. Total takedown
c. Concession
d. Spread
a. Manager's fee
b. Total takedown
c. Concession
d. Spread
D
The "spread" in a municipal bond underwriting is the gross profit earned by the syndicate. It is the difference between the amount the issuer receives for the bonds and the production (public offering price for the bonds). The "takedown" is the discount given to syndicate members by the manager of the syndicate on any bonds sold. The concession is a trade discount given to dealers (also called dealer's reallowance) who are not members of the syndicate. For example, a syndicate member may take down bonds at par minus 5/8 and sell them to the public at par, making a 5/8 point profit. The dealer who is not a member of the syndicate may buy the bonds at par minus 1/4 point concession and sell them to the public at par, making a 1/4 point profit.
The "spread" in a municipal bond underwriting is the gross profit earned by the syndicate. It is the difference between the amount the issuer receives for the bonds and the production (public offering price for the bonds). The "takedown" is the discount given to syndicate members by the manager of the syndicate on any bonds sold. The concession is a trade discount given to dealers (also called dealer's reallowance) who are not members of the syndicate. For example, a syndicate member may take down bonds at par minus 5/8 and sell them to the public at par, making a 5/8 point profit. The dealer who is not a member of the syndicate may buy the bonds at par minus 1/4 point concession and sell them to the public at par, making a 1/4 point profit.
The interest paid on special assessment bonds is derived from:
a. Ad valorem taxes
b. Toll road revenues
c. Charges on the benefited property
d. Excise taxes
a. Ad valorem taxes
b. Toll road revenues
c. Charges on the benefited property
d. Excise taxes
C
The interest paid by the issuer to holders of special assessment bonds are derived from charges made to the users of the benefited property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.
The interest paid by the issuer to holders of special assessment bonds are derived from charges made to the users of the benefited property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.
A revenue bond's indenture will include which of the following?
I. The legal opinion
II. A rate covenant
III. The maturity feature
IV. Reoffering yields
a. I and II only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV
I. The legal opinion
II. A rate covenant
III. The maturity feature
IV. Reoffering yields
a. I and II only
b. I and III only
c. I, II, and III only
d. I, II, III, and IV
C
A revenue bond's indenture would include the legal opinion, the rate covenant, and the maturity feature. A rate covenant is the agreement of the municipality to maintain rates that are charged to customers for the use of a facility at a sufficient level to pay debt service. Reoffering yields are not found in the indenture of the revenue bond. Reoffering yields are the rates at which the syndicate bidder will offer the bonds to the public, after buying the bonds from the municipality.
A revenue bond's indenture would include the legal opinion, the rate covenant, and the maturity feature. A rate covenant is the agreement of the municipality to maintain rates that are charged to customers for the use of a facility at a sufficient level to pay debt service. Reoffering yields are not found in the indenture of the revenue bond. Reoffering yields are the rates at which the syndicate bidder will offer the bonds to the public, after buying the bonds from the municipality.
The federal tax exemption for interest earned on an industrial revenue bond is NOT available if the:
a. Holder of the bond is a substantial user of the facility
b. Issuer does not subscribe to equal opportunity employer standards
c. Bonds are not approved by the MSRB
d. Underwriter has a control relationship with the issuer
a. Holder of the bond is a substantial user of the facility
b. Issuer does not subscribe to equal opportunity employer standards
c. Bonds are not approved by the MSRB
d. Underwriter has a control relationship with the issuer
A
If the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption on the interest earned would not apply.
If the holder of an industrial revenue bond is a substantial user of the facility, then the federal tax exemption on the interest earned would not apply.
A municipal securities broker dealer has a control relationship with an issuer. When selling the bonds subject to the control relationship, the broker dealer must disclose this relationship to customers:
I. Prior to the trade
II. In writing at or prior to settlement
III. For discretionary accounts only
IV. For all accounts and for any type of transaction
a. I and III only
b. II and III only
c. I, II, and III only
d. I, II, and IV only
I. Prior to the trade
II. In writing at or prior to settlement
III. For discretionary accounts only
IV. For all accounts and for any type of transaction
a. I and III only
b. II and III only
c. I, II, and III only
d. I, II, and IV only
D
Customers must be informed about the existence of a control relationship regardless of the type of account (i.e., discretionary or nondiscretionary) or type of transaction (i.e., agency or principal). The customer must be told of the relationship prior to the trade. A written disclosure must be made to the customer regarding a control relationship at or prior to the settlement date.
Customers must be informed about the existence of a control relationship regardless of the type of account (i.e., discretionary or nondiscretionary) or type of transaction (i.e., agency or principal). The customer must be told of the relationship prior to the trade. A written disclosure must be made to the customer regarding a control relationship at or prior to the settlement date.
According to MSRB rules, all of the following must be included on a confirmation sent by a broker-dealer to a customer, EXCEPT the:
I. Total dollars due including any accrued interest
II. Moody's and/or Standard and Poor's rating
III. Capacity in which the broker-dealer acted
IV. Denominations of the securities to be delivered
a. I and III only
b. I and IV only
c. II and IV only
d. III and IV only
I. Total dollars due including any accrued interest
II. Moody's and/or Standard and Poor's rating
III. Capacity in which the broker-dealer acted
IV. Denominations of the securities to be delivered
a. I and III only
b. I and IV only
c. II and IV only
d. III and IV only
C
MSRB rules require that a confirmation be sent to a customer at or before the completion of the transaction (settlement date). The confirmation must include whether the customer purchased or sold, the par amount, and a complete description of the securities, including coupon and maturity date. Any pertinent call feature must be shown as well as the principal amount, accrued interest, and total amount of the transaction. The broker-dealer must disclose if it acted as principal or agent, and if acting as an agent, the amount of the commission must be disclosed. Ratings and denominations are not included on the confirmation.
MSRB rules require that a confirmation be sent to a customer at or before the completion of the transaction (settlement date). The confirmation must include whether the customer purchased or sold, the par amount, and a complete description of the securities, including coupon and maturity date. Any pertinent call feature must be shown as well as the principal amount, accrued interest, and total amount of the transaction. The broker-dealer must disclose if it acted as principal or agent, and if acting as an agent, the amount of the commission must be disclosed. Ratings and denominations are not included on the confirmation.
A municipal bond pays interest on February 1st and August 1st. How many days of accrued interest will the buyer pay the seller if the bond is purchased on Wednesday, May 31st?
a. 96 days
b. 120 days
c. 124 days
d. 125 days
a. 96 days
b. 120 days
c. 124 days
d. 125 days
C
The trade date is Wednesday, May 31st. The bond pays interest on February 1st and August 1st. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Monday, June 5th. The following calculation illustrates the answer:
February 30 days
March 30 days
April 30 days
May 30 days
June 4 days
124 days
The trade date is Wednesday, May 31st. The bond pays interest on February 1st and August 1st. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Monday, June 5th. The following calculation illustrates the answer:
February 30 days
March 30 days
April 30 days
May 30 days
June 4 days
124 days
All of the following services rate securities, EXCEPT:
a. Moody's
b. Standard & Poor's
c. Fitch
d. AMBAC
a. Moody's
b. Standard & Poor's
c. Fitch
d. AMBAC
D
AMBAC insures new municipal issues. Moody's, Standard & Poor's, and Fitch are rating services.
AMBAC insures new municipal issues. Moody's, Standard & Poor's, and Fitch are rating services.
Which of the following syndicate practices are TRUE when a new municipal issue is being sold?
I. Member orders will receive priority over designated orders.
II. There is usually a period of time allowed for the accumulation of orders.
III. Syndicate procedures must be disclosed to potential purchasers.
IV. Pre-sale orders receive the highest priority.
a. II and IV only
b. III and IV only
c. I, II, and IV only
d. I, II, III, and IV
I. Member orders will receive priority over designated orders.
II. There is usually a period of time allowed for the accumulation of orders.
III. Syndicate procedures must be disclosed to potential purchasers.
IV. Pre-sale orders receive the highest priority.
a. II and IV only
b. III and IV only
c. I, II, and IV only
d. I, II, III, and IV
A
Pre-sale orders receive the highest priority and a period of time must be allowed for the accumulation of orders. Member orders do not receive priority over designated orders and syndicate procedures do not have to be disclosed to potential purchasers.
Pre-sale orders receive the highest priority and a period of time must be allowed for the accumulation of orders. Member orders do not receive priority over designated orders and syndicate procedures do not have to be disclosed to potential purchasers.
Which of the following would not be a violation of MSRB rules?
I. A gift to a customer of $100
II. A yearly magazine subscription given to a customer worth $50
III. A gift of basketball tickets to a customer worth $75
IV. A business lunch with a customer that costs $125
a. IV only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV
I. A gift to a customer of $100
II. A yearly magazine subscription given to a customer worth $50
III. A gift of basketball tickets to a customer worth $75
IV. A business lunch with a customer that costs $125
a. IV only
b. I and II only
c. I, II, and III only
d. I, II, III, and IV
D
MSRB rules allow gifts of $100 or less to customers. There is no limit on legitimate business expenses so the business lunch of $125 would not be a violation even though it is more than $100. Therefore, all of the choices listed would not violate MSRB rules.
MSRB rules allow gifts of $100 or less to customers. There is no limit on legitimate business expenses so the business lunch of $125 would not be a violation even though it is more than $100. Therefore, all of the choices listed would not violate MSRB rules.
In January an investor receives a bonus from her employer. She will need to have access to the funds in April. An RR should NOT recommend which of the following municipal securities?
a. A variable rate demand obligation
b. An auction rate security
c. A tax anticipation note
d. A bond anticipation note
a. A variable rate demand obligation
b. An auction rate security
c. A tax anticipation note
d. A bond anticipation note
B
VRDOs and ARS are both are long-term securities with short-term trading features. VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARS) do not have this feature and if the auction fails the investor may not have immediate access to their funds. TANs and BANs are short-term municipal notes and if their maturities extend beyond April, these securities could be easily sold in the secondary market.
VRDOs and ARS are both are long-term securities with short-term trading features. VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARS) do not have this feature and if the auction fails the investor may not have immediate access to their funds. TANs and BANs are short-term municipal notes and if their maturities extend beyond April, these securities could be easily sold in the secondary market.
The bond counsel for a new municipal revenue bond issue may render a qualified legal opinion under which TWO of the following situations?
I. The issuer does not have clear title to the property.
II. Construction of a competing facility may cut projected revenue flow.
III. The underwriting syndicate has not provided information that the MSRB requires.
IV. The project could potentially impact a national historic site.
a. I and III
b. I and IV
c. II and III
d. II and IV
I. The issuer does not have clear title to the property.
II. Construction of a competing facility may cut projected revenue flow.
III. The underwriting syndicate has not provided information that the MSRB requires.
IV. The project could potentially impact a national historic site.
a. I and III
b. I and IV
c. II and III
d. II and IV
B
When situations exist that could create potential problems for a proposed facility, the bond counsel will render a qualified legal opinion. These situations would include I and IV in that both would subject the issuer to potential legal action. Whereas II and III do not deal with the legality, validity, enforceability, or tax-exempt status of the issue.
When situations exist that could create potential problems for a proposed facility, the bond counsel will render a qualified legal opinion. These situations would include I and IV in that both would subject the issuer to potential legal action. Whereas II and III do not deal with the legality, validity, enforceability, or tax-exempt status of the issue.
All of the following statements about municipal revenue bonds are TRUE, EXCEPT:
a. There is no debt limitation set by the issuing municipality
b. The maturity of the revenue bond usually coincides with the useful life of the facility being built
c. They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities
d. The interest and principal are paid from the revenue received from the facility
a. There is no debt limitation set by the issuing municipality
b. The maturity of the revenue bond usually coincides with the useful life of the facility being built
c. They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities
d. The interest and principal are paid from the revenue received from the facility
B
Municipal revenue bonds do not have maturity schedules that coincide with the usefulness of the facility being built. They mature prior to the useful life of the facility. Municipal revenue bonds do not have debt limitations as do general obligation bonds. A debt limitation is the statutory or constitutional maximum debt that an issuer can legally incur. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal are paid from the revenue received from the facility.
Municipal revenue bonds do not have maturity schedules that coincide with the usefulness of the facility being built. They mature prior to the useful life of the facility. Municipal revenue bonds do not have debt limitations as do general obligation bonds. A debt limitation is the statutory or constitutional maximum debt that an issuer can legally incur. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal are paid from the revenue received from the facility.