Ch 6: Munis Flashcards

Question

sources of rev for Rev Bonds

Answer 1

Debt service payments don't come from general or real estate taxes and are not backed by the muni's full faith and credit. Rev bonds are considered self-supporting debt bc principal and interest paym are made exclusively from rev generated by the proj for which the debt was issued. rev-producing facilities include: - utilities (water, sewer, electric) - housing - transportation - education (college dorms and student loans) - health (hospitals and retirement centers) - industrial (industrial developm and pollution control) - sports

Answer 2

trust indenture/bond resolution - muni agrees to abide by certain protective covenants to protect bondh - trustee appointed in the indenture supervises the issuer's complaints (?) with the bond covenants standard provisions on most trust indentures include: - rate covenant - maintenance covenant - insurance covenant - additional bonds test (open-ended indenture, which allows further issuance of bonds with the same status and equal claims on A or rev if permitted under bond indenture provision, OR close-ended indenture, allowing no further issuance of bonds with an equivalent lien on A or rev) - sinking fund - catastrophe clause/calamity call/extraordinary mandatory call - promise to use insurance proceeds to call bonds and repay bondholders if a facility is destroyed - flow of funds - priority of disbursing the rev collected - books and records covenant - requires outside audit of records and fin reports - call features

Answer 3

NOT required; but it does greatly increase the marketably of rev issues rev bonds tend to have trust resolution/trust indenture. whereas GOs tend to have bond resolutions

Answer 4

- industrial development rev bonds - double barreled bonds - certificates of participation - special tax bonds - special assessment bonds/special district bonds - new housing authority bonds - moral obligation bonds - muni notes - variable rate muni securities (variable rate demand obligations, auction rate securities)

Answer 5

issued to construct facilities or purchase equipment, which is then leased to a corporation. muni uses the money from lease payments to pay principal/interest on the bonds. Bonds carry the corp's debt rating. Some of these bonds are subject to the alternative min tax (AMT)

Answer 6

under a typical lease-rental (or lease-back) bond arrangement, a muni issues bonds to FINANCE OFFICE CONSTRUCTION for itself or its state/community Ex: muni issues bonds to raise money to construct a school and lease the finished building to the school district. Lease payments are the backing of the bonds. Lease payments come from funds raised through special taxes or schools' tuition/fees etc

Answer 7

rev bonds that have characteristics of GOs; they're backed by 2 SOURCES OF REV : 1) interest and principal are paid from a specialty facility's earnings 2) taxing power of the state/muni Although they're backed primarily by rev from the facility, double-barreled bonds are rated and traded as GOs.

Answer 8

a form of lease rev bonds that permits the investor to participate in a stream of rev from lease, installment, or loan payments related to the acq of land/acq or construction of specific equipment/facilities by the muni) they (like other rev issues) require no voter approval. certificates of participation are NOT viewed legally as debt of a muni payment is tied to an annual appropriation that's made by the gov body. 1 UNIQUE FEATURE WITH THESE CERTIFICATES (rare tho) is that in theory, certificate holders themselves can foreclose on the equipment/facility that the certificates finance int he event of default.

Answer 9

secured by 1 or more designated taxes other than ad valorem (property) taxes (ie. sales, tobacco, alcohol, fuel, biz license taxes) the designated tax does NOT have to be directly related to project purpose! Such bonds are not considered self-supporting debt. Meaning that other sources may be used if the taxes generated are insufficient. You might see these called designated tax bonds.

Answer 10

issued to finance the construction of PUBLIC IMPROVEMENTS (ie. streets, sidewalks, or sewers) issuer assesses a tax only on the property that benefits from the improvement and uses the funds to pay principal and interest.

Answer 11

are for new housing projects (NOT necessarily newly issued bonds) local housing authorities issue: - NEW HOUSING AUTHORITY BONDS (NHAs)/Public Housing Authority Bonds (PHAs to develop and improve low-income housing; these are backed by full faith and credit of US gov bc of their federal backing, they're considered the mOST SECURE OF ALL MUNI BONDS PHAs are backed by the rental income from the housing; if rental income is not sufficient to service the debt, the fed gov makes up any shortfall. Note: these bonds are NOT considered to be double-barreled; to be double-barreled, a bond MUST BE BACKED BY MORE THAN 1 MUNI REV SOURCE. Here, the 2nd backing is the fed gov

Answer 12

muni issued backed in full by the US gov also called Section 8 Bonds

Answer 13

state or local-issued, or state or local-agency issued, bond If rev or tax collections backing the bond are not sufficient to pay the debt service, the state legislature has the authority to appropriate funds to make payments. The potential backing by state rev tends to make the bonds MORE MARKETABLE, but the state's obligation is not established by law. it's a moral oblig only. If the moral obligation bond goes into default, the only bondh can be repaid is through legislative apportionment. The issues legislature would have to apportion money to satisfy the debt but is not legally obligated to do so. Remember, the issuer, has a mORAL BUT NOT LEGAL OBLIGATION TO SERVICE THE DEBT. ***ALL MORAL OBLIGATION BONDS ARE CONSIDERED REV BONDS.

Answer 14

ST securities that generate funds for a muni that expects other rev soon; usually have less than 12-month maturities, altho maturities may range from 3 months to 3 yrs INTEREST AND PRINCIP PAID AT MATURITY (bc it's ST); issued at discount 1) TANs (tax anticipation notes) - munis issue this to finance current ops in anticipation of future tax receipts; helps munis to even out CF between tax collection periods 2) RANs (rev anticipation notes) - offered periodically to fin current ops in anticipation of future revs from rev-producing projects/facilities 3) BANS (bond anticipation notes) - sold as interim financing that'll eventually be converted to LT funding through sale of bonds 4) tax-exempt CP - often used in place of BANs and TANs for up to 270 days; maturities are most often 30,60, or 90 days tho 5) construction loan notes (CLNs) - issued t provide interim financing for the construction of housing projects 6) grant anticipation notes - issued with the expectation of receiving grant money from the fed gov

Answer 15

MSRB calls these RESET SECURITIES bc interest rate is rest at certain intervals. these are muni debt securities with interest rates that fluctuate based on current market interest rate changes 2 types of variable rate securities: 1) variable rate demand obligations (VRDOs) - floating rate obligations that typically have a nominal LT maturity of 20-30 yrs, but have an interest rate that's reset periodically ; the reset can be daily, weekly, monthly, semiannually, or flexible; matching the interest rate to market conditions tend to keep the price of these relatively stable. 1 KEY FEATURE OF THIS SECURITY IS THE ABILITY OF THE INVESTOR TO DEMAND THE ISSUER REPURCHASE THE BONDS AT PAR. (basically, this is a put option where the investor "puts" the bond and receives the face amount plus any accrued interest; this feature is why VDROs are sometimes considered mm instruments) 2) auction rate securities (ARS) - debt securities that have int rates that are periodically reset through Dutch auctions, typically every 7, 14, 28, or 35 days. These are generally structured as bonds with LT maturities (20-30 yrs); - munis and public authorities, student loan providers, and other institutional borrowers 1st began using these to raise funds in the 80s; these are marketed to retail investors who are seeking a cash-equiv investment that pays a HIGHER YIELD THAN MM MFs or CDs (altho ARS do NOT have the same liquidity as those)

Answer 16

1) income 2) net worth 3) debt paying history 4) your outstanding debt

Answer 17

primary sources of muni income: - FOR STATE INCOME: income and sales taxes are major sources of state income - FOR COUNTIES/CITY INCOME: real property taxes are principal income source of counties, and schools districts are the largest source of city income - FOR CITY INCOME: includes fines, license fees, assessments, sales taxes, hotel taxes, city income taxes, utility taxes, and any city personal property taxes

Answer 18

consider demographics data: - property values - retail sales per capita - local bank deposits - diversity of industry in its tax base - pop growth or decline

Answer 19

quant analysis focuses on munis' pop, property values, and per capita income. Qualitative analysis used to look at subject factors/community's attitude toward debt and taxation - debt limits may be placed; state constitution or city charter can also limit the purposes for which a city may issue bonds - ad valorem taxes - property taxes are based on property's assessed valuation - analyzing the official statement (OS) - muni bonds provide a form of prospectus (disclosure doc) known as an OFFICIAL STATEMENT - debt statement - analysis of GO debt, which includes full val of taxable property, value of property, assessm %

Answer 20

total debt (sum of all bonds iseud by muni), subtracts SELF SUPPORTING DEBT resulting in NET DIRECT DEBT (which includes GOs and ST notes)

Answer 21

When assessing the quality of re bonds, an investor should consider: - economic justification - facility being built should be able to generate rev - competing facilities - facility should not be placed where better alternatives are easily available - sources of rev - sources should be dependable - call provisions - with callable bonds, the higher the call premium, the more attractive a bond is to an investor - flow of funds - rev generated must be sufficient to pay all of the facility's op expenses and to meet debt service obligations ECRCF

Answer 22

- rating - maturity (shorter the time until maturity, the more marketable the bond) - coupon (higher coupon = more marketable) - block size - typical block for a muni bond trade is $100K; trades that are in smaller amounts are NOT as marketable - call features - longer the call provisions, the more marketable the bond. That means noncallable bonds are the most marketable - dollar price - bonds with a lower dollar price are more marketable - refunding - (like refinancing; when interest rates fall, munis issue new bonds at lower rates; they then use the proceeds from NEW BONDS to pay off OLD, higher interest debt); REFUNDING INCREASES QUALITY OF BONDS - muni bond insurance note: the more marketable the muni, the lower the profit to the muni dealer (less markups!)

Answer 23

ease/difficulty with which securities can be sold int he market

Answer 24

1. active refunding (prerefeunding) - refinancing an existing muni bond issued BEFORE its maturity/call date by using money from sale of a new bond issue (proceeds of new bond issue are used to purchase special gov securities) 2. current refunding - differs from advance refunding in that old bonds will be REDEEMED WITHIN 90 DAYS or less from date of issuance of refunding bonds.

Answer 25

marketability of muni bond plays a key role in determining fair prices and commissions MSRB rule states that markups/markdowns/commissions must be be fair and reasonable and listed on the customer confirmation, taking into acct all characteristics of a trade, such as: - FMV of securities at trade time - total dollar amt of the transaction - any special difficulty in doing the trade, and - fact that the dealer is entitled to a profit

Answer 26

dealer could limits its profit on a transaction to a reasonable level and STILL violate this rule if dealer fails to consider market value!

Answer 27

- nominal (coupon) yield - current yield - YTM - YTC - Accrued interest

Answer 28

- corporates, agencies, munis: use 30-day months (360-day yr) - US Treasuries use actual day months (365 days) when counting days: - go back and include the last interest payment date - go up to but NOT include settlement date

Answer 29

when a debt security is trading flat, it means no accrued interest is included in the transaction when the trade takes place so that it settles on an interest payment date, there is NO accrued interest bc the seller will receive a check from the issuer for the interest.

Answer 30

Amortization: - reduces cost basis - reduces reported interest income Accretion - increases cost basis - increase reported interest income

Answer 31

- articles of incorporation (if the BD is a corp) or partnership agreement (if BD is a partnership) - minutes of board or partnership meetings - records of stock certificates (if BD is a corp)

Answer 32

- blotters (records of original entry) - general ledger (accting info such as income and expense and assets and liabilities) - customer ledgers (statements of the customer's accts) - customer acct records (6 yrs after acct is closed) - customer complaints (only written complaints are considered and email is WRITTEN) - principal designation record (which individual supervises what)

Ch 6: Munis Flashcards

(56 cards)