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34 Cards in this Set
- Front
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For a new issue municipal syndicate account, settlement of the account must occur:
A) when the last bond is sold with no time limit imposed B) within 1 year after the issuer delivers the securities to the syndicate C) within 30 calendar days after the issuer delivers the securities to the syndicate D) as soon as dealers who are not members of the syndicate request a bond |
Answer: C
The max length of time a new issue muni bond syndicate can exist is 30 calendar days after the issuer delivers the securities to the syndicate. At that time, the account must be settled and allocation of unsold bonds be determined in accordance with each member's original allocation and whether the syndicate was set up as divided (western) or undivided (eastern). |
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The reoffering yield on a new muni bond issue is the:
A) coupon rate on the new issue. B) yield at which the bonds are offered to the public. C) interest rate minus any premiums that underwriters are willing to pay. D) tax-equivalent yield of the new issue. |
Answer: B
In a competitive bidding situation, each underwriter submits a sealed, written bid. Once the bid has been awarded, the bonds are repriced to give the underwriters a profit when selling them to the public. The yield at which the bonds are sold is called the reoffering yield. |
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A dealer that quotes a concession of 1/2 to another dealer means:
A) 1/2% of the dealer's price B) a 50% commission split C) $5 per $1000 of par D) 1/2% of the market price |
Answer: C
A concession between broker/dealers on secondary market transactions is a discount from the yield that the broker/dealer is quoting. It is common for a B/D to offer bonds to other B/Ds at a price less the concession. The net price becomes the purchase price for the buying B/D. If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed, but held in the B/D's inventory, it is fair for the B/D to market his inventory and mark up from there for retail sale. ($5 = 1/2 point) |
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Which of the following underwriting arrangements is associated with an invitation, typically found in The Bond Buyer, directed at investment bankers and broker/dealers, intended to solicit interest in underwriting a new municipal issue?
A) Competitive bid B) Best efforts C) Negotiated D) All or none |
Answer: A |
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Which of the following describe an underwriter's financial liability if a syndicate is established as an Eastern Account?
1. Divided liability to purchase securities from the issuer. 2. Undivided liability to purchase securities from the issuer. 3. Divided responsibility for securities that remain unsold. 4. Undivided responsibility for securities that remain unsold. |
Answer: 2 & 4
An Eastern account has both undivided liability when purchasing the bonds from the issuer and undivided responsibility for bonds that remain unsold. |
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An Eastern account underwriting $100M in municipal bonds is established. ALFA Securities agrees to underwrite 10% of the issue and sells out its allotment of $10M. However, some of the other firms participating in the deal are not as successful, and $15M of the bonds remain unsold. What is ALFA Securities' financial obligation?
A) Pooled responsibility for $15M B) $1.5M C) 0 D) $150,000 |
Answer: B
Undivided liability in an Eastern account means this member is liable for 10% of the unsold bonds (10% x $15M = $1.5M) |
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A Western account underwriting $100M in municipal bonds is established. A member firm agrees to underwrite 10% of the issue and sells out its allotment of $10M. However, some of the other firms participating are unable to sell their full allocation, and $15M of the bonds remain unsold. What is the member firm's financial obligation?
A) Pooled responsibility for $15M B) 0 C) $150,000 D) $1.5M |
Answer: B
Divided liability in a Western account means that if a member meets its committment, it has no further liability for unsold bonds. |
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If the State of TX has solicited bids for a proposed municipal bond offering, the underwriter for that offering would be a firm that would:
A) sell the issue at the highest price. B) sell the issue at the lowest price. C) generate the most proceeds for TX. D) sell the issue at the lowest cost to TX. |
Answer: D
The syndicate manager that offers the lowest net interest cost to the State of TX will be awarded the bid. Once TX decides how much money it must raise, the question is how much the issue will cost in net interest during its entire life. |
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The terms of a municipal general obligation (GO) and revenue bond offerings may be set by the issuer as:
A) competitive bid underwriting arrangements only. B) negotiated underwriting arrangements only. C) neither competitive nor negotiated. D) either competitive or negotiated. |
Answer: D
Municipal bond underwriting terms may be set by the issuer as either competitive bid or negotiated for both GO & revenue bond issues. |
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The syndicate manager takes which of the following actions in a divided municipal syndicate that does not sell out?
A) Holds an auction B) Returns the bonds to the issuer C) Confirms the bonds to the member that did not sell its share D) Prorates the bonds according to syndicate participation |
Answer: C
Because this offer is a divided (aka Western) syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory. |
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What is the profit to a syndicate member if a syndicate is offering an 8 1/2% bond at 100, the syndicate manager is giving a .75 concession and a 1 point total takedown, and the syndicate member sells 1000 bonds?
A) $17,500 B) $10,000 C) $1,000 D) $7,500 |
Answer: B
When a member of the syndicate sells a bond, they are entitled to the total takedown. In this case, 1 point ($10/bond) x (1000 bonds sold) = $10,000 profit. Remember that the concession would only go to those who are not members of the syndicate but are part of the selling group instead. |
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Which of the following are TRUE of the Bond Buyer Revenue Bond Index (Revdex)?
1. It includes 30 year bonds 2. It includes 20 bonds 3. It is compiled weekly 4. It is complied monthly |
Answer: 1 & 3
The Bond Buyer Revdex is computed weekly, just like the Bond Buyer's GO index. Revdex consists of 25 revenue bonds with 30 year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity. |
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Your manager notifies you that a new municipal revenue bond issue you've been working on has been oversubscribed. How is the order acceptance priority for this issue determined?
A) As outlined in the agreement among underwriters. B) On a first-come, first-serve basis. C) As outlined in the indenture. D) As outlined in the legal opinion. |
Answer: A
The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate, once the bid is won. This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement. |
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Who signs the agreement among underwriters for a municipal bond issue?
A) Managing underwriter & trustee B) Managing underwriter & bond counsel C) All members of the underwriting syndicate D) Managing underwriter & issuer |
Answer: C
All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel or trustee. |
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Your firm is interested in submitting a bid on a forthcoming GO municipal bond issue. Your firm could obtain the appropriate bid worksheets through a service provided by:
A) The Bond Buyer B) The Wall Street Journal C) The MSRB D) Standard & Poor's |
Answer: A
Official notices of sale, announcing the offering of municipal issues to competitive bidders are published in the Bond Buyer, which offers a service to subscribers called The New Issue Worksheet and Record Service, which summarizes each notice. It provides information about new issues put up for bid and worksheets for underwriters to determine yields and prices when bidding. |
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Which of the following would be found in the agreement among underwriters for a municipal bond offering?
1. Legal opinion 2. Amount of the concession 3. Appointment of the bond counsel 4. Establishment of the takedown |
Answer: 2 & 4
The agreement among underwriters describes the rights, duties and commitments of the syndicate members regarding the securities being underwritten. It appoints the syndicate manager to act on behalf of the syndicate and includes provisions dealing with underwriting compensation (takedown & concession). The legal opinion is a document prepared by the bond counsel, and the appointment of the bond counsel is the issuer's responsibility. |
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Which of the following terms refer to municipal bond underwritings?
1. Standby 2. Best efforts 3. Preliminary prospectus 4. Firm commitment |
Answer: 2 & 4
Negotiated municipal underwritings can be performed on a firm commitment, best efforts or all-or-none basis. Standby underwritings are used only for corporate underwritings. The term preliminary prospectus, or red herring, refers to a corporate underwriting. In a municipal underwriting, the issue is described in the official statement or, if prepared, a preliminary official statement. |
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The underwriting manager of a Western underwriting syndicate has committed to sell $250K worth of bonds out of a total offering of $1M. There are 10 underwriters of this new issue. The firm sells its entire share, but $100K worth of the total bonds remains unsold. What is the manager's remaining liability?
A) 250,000 B) 100,000 C) 0 D) 10,000 |
Answer: C
In a divided (Western) syndicate, each syndicate member is responsible only for its own underwriting obligation. Because the underwriting manager sold its share, it is not liable for the unsold bonds. Rather, the manager will confirm the bonds to each member that did not sell its participation. |
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An order confirmed for the entire underwriting syndicate's benefit is called a:
A) net designated order B) market order C) member at the takedown order D) group net order |
Answer: D
A municipal group net order is credited to syndicate members according to their percentage participation in the account. This order type is given priority over designated or member takedown orders (but not over presale orders). The normal order of priority is presale orders, group syndicate orders, designated orders & member orders. |
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Nonmembers of a syndicate who are assisting in its sale of bonds buy the bonds at a discount called:
A) a concession B) a takedown C) a net designated price D) the basis price |
Answer: A
Members of the syndicate buy the bonds at the offering price minus the takedown. Nonmembers buy at offering price minus a concession. The basis price is the YTM. |
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Which of the following is associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue?
A) Eastern underwriting B) Competitive bid C) Negotiated underwriting D) Western underwriting |
Answer: C
In a negotiated underwriting, the municipality appoints an underwriting group of investment bankers or broker/dealers to underwrite the offering. The underwriters will then work with the municipal issuer to establish the interest rate and offering price of the new issue to best meet the municipality's needs and in light of current market conditions. |
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All of the following statements regarding a negotiated underwriting are true EXCEPT that:
A) either municipal GO or revenue bonds can be underwritten on a negotiated basis. B) all states require that GO bonds must be underwritten using a negotiated process. C) the municipality appoints the underwriter. D) the investment banker consults with the issuer to establish a price for the issue. |
Answer: B
When a municipality appoints an underwriter, the bond issue is a negotiated underwriting. The price must be satisfactory to the issuer and still allow the underwriters to sell the bonds at a profit. There is no requirement that either GO or revenue issues be underwritten as either negotiated or competitive bid. Each may be underwritten using either process. |
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Which of the following competitive bids on a new municipal issue is MOST likely to be awarded the bid?
A) 8% coupon w/premiums over par B) 6% coupon w/premiums over par C) 6% coupon w/no premiums over par D) 7$ coupon w/no premiums over par |
Answer: B
In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the 6% coupon on the bonds. |
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One member of a municipal syndicate is opposed to bidding on a particular issue because of some of the restrictions outlined in the official notice of sale. The other 8 members of the syndicate have agreed on price and vote to submit their bid. In this situation, the syndicate manager can do all of the following EXCEPT:
A) require the dissenting member to accept its prorated share of the offering. B) submit the bid after reaching a consensus. C) allow members to drop from the syndicate and add new members. D) withdraw from the bidding process. |
Answer: A
The manager cannot force members to participate in the bid. The firm can ask members to reach a consensus, change the composition of the syndicate or withdraw from the bidding process. |
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The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is the:
A) spread B) discount C) selling concession D) scale |
Answer: A |
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Which of the following documents spells out the rights of each member of the underwriting syndicate and how the issue is allocated?
A) Preliminary official statement B) Legal opinion C) Syndicate letter D) Official notice of sale |
Answer: C
The syndicate letter (also called the agreement among underwriters, syndicate agreement, syndicate account letter or account summary report) is the document that forms the syndicate and spells out each member's rights and obligations. The allocation of the new bond offering that is accorded each syndicate member is detailed in this agreement. |
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In what order, from 1st to last, would a syndicate member allocate orders for a new muni bond issue?
1. Presale orders 2. Designated orders 3. Member orders 4. Group net orders |
Answer: 1, 4, 2, 3
The standard order priority for muni bond issue allocation as stated within the syndicate letter is: Presale, Group, Designated and Member. Orders that benefit all syndicate members have the highest priority. |
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In a municipal underwriting, the order period is the time in which the syndicate:
A) manager establishes the priority for confirming orders. B) manager accepts and allocates orders without considering time of submission. C) manager delivers the certificates to each syndicate member. D) announces it will solicit customers for the issue. |
Answer: B
The order period is a short period of time following the award of a muni issue to the winning syndicate. During the order period, orders for an issue of muni bonds are allocated in accordance with the priority defined in the syndicate letter, not on a first-come, first-serve basis. |
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In the context of a muni bond underwriting, the true interest cost (TIC) is different from the net interest cost (NIC) because it:
A) is the method required by the IRS. B) produces a lower cost of borrowing for the issuer. C) reflects the time value of money. D) reflects the credit risk. |
Answer: C
The TIC method uses present value calculations that consider the time value of money (as opposed to NIC, which does not consider the timing of interest pmts). It is a more complicated calculation than net interest cost. The IRS is not concerned with this issue. |
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Your firm is a member of an underwriting syndicate for an issue of muni bonds. The muni syndicate releases a terms letter stating that the bonds are being offered net, with a 2 point concession and 1/2 point additional takedown. If your firm sells $100K of these bonds to a retail customer, it will receive a credit of:
A) 500 B) 2000 C) 100000 D) 2500 |
Answer: D
A syndicate member receives the bonds net of the total takedown (which consists of the concession plus the additional takedown). Therefore, the bonds are taken by the syndicate net of 2 1/2 points (2.5% x $100K = $2500) |
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In a competitive offering of muni bonds, the issue is usually awarded to the syndicate that offers to sell the bonds:
A) with the smallest spread. B) in the shortest possible time. C) with the lowest net interest cost to the issuer D) at the highest price. |
Answer: C
In a competitive underwriting for muni bonds, competing syndicates submit bids to the issuer. The issuer (or rep), examines the bids to determine which bid provides the issuer with the lowest net interest cost. |
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An abstract of a municipal securities issue official statement must be maintained on file for:
A) 5 years B) 12 months C) There is no requirement to file abstracts of official statements D) 3 years |
Answer: D
The MSRB requires firms to retain abstracts of official statements for 3 years, the same as all pieces intended to communicate with the public. |
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Voter approval may be required for new bond issues for construction of which of the following?
1. Airports 2. Turnpikes 3. State prisons 4. Public high schools |
Answer: 3 & 4
Voter approval may be required for new issues of GO bonds. State prisons and public high schools are among the facilities for the public good that are built and supported by GO issues. User fees (like tolls) support revenue bond issues for construction of facilities, such as airports and turnpikes. |
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The initial confirmation of a "when-issued" municipal bond contains which of the following?
1. Number of bonds involved in the transaction. 2. Settlement date. 3. YTM 4. Total dollar amount due. |
Answer: 1 & 3
On a new muni bond offering, where the customer receives a "when", "as" and "if" issued confirmation, the final settlement date is not known, therefore, the amount of accrued interest is also unknown. Thus, the total dollar amount is unknown because it includes accrued interest. The number of bonds purchased and the YTM (price) are known and must be included on the confirmation. |
