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65 Cards in this Set
- Front
- Back
Municipal bonds |
securities that state govs, local govs, or U.S. territories issue, uses money to fund and support projects such as roads, sewer systems, hospitals |
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Characteristics of GO bonds |
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 |
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Analyzing marketability of GO bonds |
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) |
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Net overall debt |
includes debt municipality owes directly + portion of overlapping debt that the municipality is responsible for |
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Net direct debt |
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 |
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Overlapping debt |
occurs when several authorities in a geographic area have the ability to tax the same residents Ex. have to pay Summit County, Hudson, Ohio |
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Calculating debt per capita (per person) |
take the debt (overall, direct, or overlapping) and divide it by the number of people in the municipality, lower the better for the investor |
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What is the driving force behind paying back investors for GO bonds? |
property taxes (collected by municipalities not states) and sales taxes, also helped by traffic fines and licensing fees |
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Property values |
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 |
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Population |
more people that live there and pay taxes the better, population trend is important-moving in better than moving out |
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Tax base |
number of people living in the municipality, assessed property values, and how much the average person makes, larger the better |
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Sales per capita |
amount of sales per capita (amount of goods the average person buys) is important |
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Traffic fines and licensing fees |
fees paid for speeding tickets and getting licenses goes to paying off municipalities debt in GO bonds |
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Revenue bonds |
issued to fund municipality facilities that will generate enough income to support the bonds such as certain utilities, toll roads, airports ,hospitals, student loans |
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Industrial development revenue bonds (IDR's) |
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) |
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Characteristics of revenue bonds |
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 |
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covenant |
promises that protect the investors by holding the issuer legally accountable Apply to revenue bonds |
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additional bonds test |
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 |
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open-ended indenture on initial bonds |
additional bonds will have equal claims to the assets |
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close-ended indenture on initial bonds |
any bonds issued are subordinate (rank lower than) the original issue |
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Rate of covenant |
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) |
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Maintenance covenant |
promises the municipality will take care of the facility and any equipment so the facility continues to earn revenue |
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Insurance covenant |
promises the municipality will insure the facility |
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catastrophe clause |
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 |
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flow of funds |
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 |
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net revenue pledge |
if municipality pays operation and maintenance first |
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gross revenue pledge |
if municipality pays debt service first |
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debt service coverage ratio |
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) |
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Special tax bonds |
secured by one or more taxes other than valorem (property) taxes, may be backed by sales tax on fuel, tobacco, alcohol, etc. |
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Special assessment (special district) bonds |
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 |
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Double-barreled bonds |
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 |
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Limited-tax general obligation bonds (LTGO's) |
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 |
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Public housing authority bonds (PHA's) |
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 |
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Moral obligation bonds |
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 |
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What do municipalities issue when they need short term (interim) financing? |
Municipal notes, used to bring in revenue until other revenues are received, typical maturity is one year or less (3-5 months) |
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Tax anticipation notes (TAN's) |
provide financing for current operations in anticipation of future taxes that the municipality will collect |
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Revenue anticipation notes (RAN's) |
provide financing for current operations in anticipation of future revenues that the municipality will collect |
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Tax and revenue anticipation notes (TRAN's) |
combo of TAN's and RAN's |
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Grant anticipation notes (GAN's) |
provide interim financing while the municipality waits for a grant from the U.S. gov, paid off by grant funds received |
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Bond anticipation notes (BAN's) |
bonds provide interim financing while waiting for long-term bonds to be issued |
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Construction loan notes (CLN's) |
provide interim financing for the construction of multifamily apartment buildings |
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Project notes (PN's) |
provide interim financing for the building of subsidized housing for low-income financing |
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Tax-exempt commercial paper |
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 |
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AON (all or none) |
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 |
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Municipal note ratings |
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 |
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Is there a tax on municipal notes? |
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 |
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taxable equivalent yield (TEY) |
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) |
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municipal equivalent yield (MEY) |
the yield on a taxable bond after paying taxes MEY = (municipal yield) x (100% - investor's tax bracket) |
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Which bonds are triple-tax free? (interest is exempt from federal, state, and local taxes) |
U.S. territories and federal districts Ex. Puerto Rice, Guam, U.S. Virgin Islands, American Samoa, Washington D.C. |
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Which type of municipal bonds are issued triple tax-free? |
Bonds issued and bought in the same state *don't assume a bond is triple-tax free unless stated on the test* |
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Does the tax advantage apply to the interest and sale of bonds? |
Only interest, if bonds are sold for more than the purchased value there are taxes on the capital gains |
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90-day apprenticeship period |
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 |
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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 |
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 |
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Advertising and record keeping |
brokerage firm must keep all advertising for at least three years and they must be easily accessible, required to be accurate and true |
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Gifts |
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 |
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Commissions |
no specific maximum guideline, but they must be fair and reasonable, and can't discriminate among customers |
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bond resolution (indenture) |
provides investors w/ contract terms, not required by law but most municipalities publish one with the bond issue |
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Legal opinion |
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 |
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Broker's broker |
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 |
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ex- legal stamped bond |
does not contain a legal opinion |
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Qualified legal opinion |
bond counsel has some reservations about the issue *think of qualified as bad |
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Unqualified legal opinion |
bond counsel is issuing a legal opinion w/o reservations *think of unqualified as good |
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Official statement |
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 |
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Bond Buyer |
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) |
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For Further Review (Part 2 / Ch. 8) |
pgs. 109-110 |