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22 Cards in this Set
- Front
- Back
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A member of a $5M Eastern account that has a $500K participation fails to sell $200K of bonds. At the close of the offering, if $1M of bonds remains unsold, the member must take down:
A) 200K B) 100K C) 300K D) 500K |
Answer: B
In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue's original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1M = $100K). |
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A balloon maturity of municipal securities is MOST accurately described as:
A) a serial issue of bonds on which the interest rate periodically changes over the life of the issue for all bonds remaining outstanding. B) bonds comprising all of a particular issue which come due in a single maturity. C) an often larger maturity within a serial issue of bonds which contains a disproportionately large percentage of the principal amount in the original issue. D) an obligation granting the bondholder the right to require the issuer to purchase the bonds at par at a certain time prior to maturity. |
Answer: C
A balloon maturity is generally distinguished from term bonds by the presence of serial maturities in the years immediately preceding the maturity which contains a disproportionately large percentage of the principal amount of the original issue. |
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In analyzing a municipal government obligation bond, an increase in all of the following would be a negative indication EXCEPT: A) delinquent taxes B) property values C) unemployment D) municipal operating expenses |
Answer: B
Increasing property values would actually have a tendency to increase the taxes paid to the municipality. |
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Which of the following statements regarding municipal bonds with call provisions are TRUE?
1. Call provisions are advantageous to the issuer. 2. Call provisions are advantageous to the investor. 3. Bonds are likely to be called in a falling interest rate environment. 4. Bonds are likely to be called in a rising interest rate environment. |
Answer: 1 & 3
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The interest from which of the following bonds is subject to federal income tax?
1. State of Nebraska 2. City of Duluth 3. Treasury notes 4. FNMA |
Answer: 3 & 4
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Interest received on a CA GO bond, purchased by a San Francisco resident is exempt from:
A) state & federal income taxes B) federal income tax only C) state income tax only D) capital gains taxes only |
Answer: A
A municipal bond is generally exempt from federal and state income taxes in the state in which it was issued. The exemption, or lack thereof, applies to interest, not capital gains. |
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A resident of Minnesota is in the 28% federal tax bracket and the 4% state tax bracket. This person must pay both federal and state taxes on:
A) Federal National Mortgage Association pass-throughs B) Minneapolis Housing Auth bonds C) Federal Home Loan Bank notes D) Treasury Bills |
Answer: A
The interest income from most US Gov't & agency securities is exempt from state and local, but not federal taxes. Mortgage-backed securities (such as FNMA & GNMA) are subject to federal, state & local taxes. The interest on municipal issues (like the MN housing authority bonds) is exempt from federal taxes and, because this investor is a MN resident, state taxes. |
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The function of a broker's broker in the municipal bond business is to do which of the following?
1. Help sell municipal bonds that a syndicate has been unable to sell. 2. Protect the identity of the firm on whose behalf the broker's broker is acting. 3. Help prepare bids for an underwriting syndicate. 4. Serve as a wholesaler, offering bonds at a discount from the current bid and offer. |
Answer: 1 & 2
A broker's broker helps sell any bonds a syndicate has left and does not disclose the identity of the firm on whose behalf it is acting. Broker's brokers do not charge fees for quoting a security, do not maintain inventory and act solely as agents. |
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Before a firm distributes a prepared summary official statement for a new issue of municipal bonds to customers, it must have the written approval of the:
A) firm's municipal securities principal. B) MSRB. C) issuer. D) bond attorney. |
Answer: A
A person qualified as a general securities or municipal securities principal must give prior written approval for municipal securities advertising or sales pieces that are intended to be used as communications with the public. Abstracts and summaries of official statements are included in the MSRB's definition of advertising. |
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A broker/dealer that is a financial advisor to a municipal issuer:
1. cannot act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. 2. cannot act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both services. 3. may always act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. 4. may always act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both services. |
Answer: 1 & 2
Broker/dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker/dealer performs an advisory function specifically associated with the underwriting, the broker/dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services. |
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While acting in a financial advisory capacity to a municipal issuer, a municipal securities dealer wants to be part of a syndicate in the underwriting of one of the issuer's bonds. Which of the following statements regarding this situation is TRUE?
A) Recognized by the MSRB as a potential conflict of interest, municipal rules generally prohibit a broker/dealer from acting in both capacities. B) The dealer would be allowed to participate and collect fees for both advisory and underwriting services supplied. C) Only an approval by the SEC could allow the broker/dealer to function in both capacities. D) The dealer must obtain the MSRB's written approval before signing the syndicate letter. |
Answer: A |
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Which is TRUE of a municipal bond broker's broker?
1. Protects customer identity. 2. Must disclose the identity of customers. 3. Has no inventory. 4. Maintains an inventory |
Answer: 1 & 3 |
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You are a municipal bond trader and have been given an out firm quote with 5 minute recall. If, 45 minutes later, the quoting dealer gives you a fill or kill, what does this mean?
A) The quoting dealer wants 5 minutes' advance notice if you fill the trade. B) You have 5 minutes to fill the order or lose the securities. C) The 5 minute recall is canceled; you must take the securities immediately or lose the trade. D) You have placed the order with the quoting dealer and it will now attempt to fill it. |
Answer: B
A 5 minute recall means that the quoting dealer will hold the securities while you attempt to find a buyer or seller at the price the dealer quoted, but it reserves the right to cut the amount of time you have to 5 minutes if another trader comes in with a firm order. |
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An investor in the 28% tax bracket is considering purchasing either a 4% municipal bond or a 5% corporate bond. Which of the following statements regarding the 2 bonds' after-tax yields is TRUE?
A) The 2 bonds' yields are equivalent B) The corporate bond's yield is higher than the muni bond's yield C) The yield difference cannot be determined D) The muni bond's yield is higher than the corporate bond's yield |
Answer: D
Investors should invest in muni bonds if the return after taxes is higher than comparable taxable bonds. To compare, use the tax-free equivalent yield formula: (taxable yield) x (100% - tax bracket) = (tax-free equivalent yield). In this case, 5% x (100% - 28%) = 5% x .72 = 3.6%. Because the muni bond yields 4% tax free, the investor should buy it; after taxes have been paid, the corporate bond yields only 3.6%. |
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An investor purchased a municipal bond at par to yield 5.5% to maturity. If, 2 yrs later, he sold the bond at a price equivalent to a 5% YTM, the investor incurred:
A) a capital loss B) a capital gain C) no taxable result at this time D) taxable interest income |
Answer: B
Because the investor sold the bond at a price that will yield less than the yield when he purchased the bond, the bond must have been sold for more than the investor paid for it. Therefore, the investor incurred a capital gain - lower yield, higher price. |
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All of the following will be included on a confirmation for noncallable municipal bonds purchased on a yield basis EXCEPT: A) taxable equivalent yield B) YTM C) dollar price D) par value |
Answer: A
As investors' tax brackets vary, taxable equivalent yield is never required to be shown. |
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In municipal bond language, what is a workable indication?
A) Likely offer B) Indication that the issuer will probably award the winning bid to your underwriting syndicate C) Indication that the managing underwriter will probably award your firm the number of bonds that it has requested D) Likely bid |
Answer: D
A muni dealer wishing to dispose of a block of bonds will seek a workable indication from another muni dealer. The workable indication from another muni dealer is not a firm bid, but a range. |
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If a customer buys callable municipal bonds, MSRB rules state that the confirmation sent to the customer must disclose the:
A) higher of either the YTC or YTM B) yield that would result if the bonds were called midway between the date they become eligible to be called and their maturity date C) nominal yield only D) lower of either the YTC or YTM |
Answer: D
MSRB Rule G-15 states that the confirmation must include the lowest possible yield. |
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Which of the following activities can occur in the municipal bond secondary market?
1. Retail sales 2. Institutional transactions 3. Interdealer purchases 4. Broker's broker trading |
Answer: All of the above |
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All of the following items of information must be included in a municipal securities confirmation EXCEPT:
A) the capacity in which the broker/dealer acted B) whether the securities are fully registered or book entry C) the date of maturity that has been fixed by a call notice D0 an extraordinary call provision |
Answer: D
MSRB rules require that certain info be included on all muni confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form and any relevant call provisions. Info on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence. |
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MSRB rules state that a customer confirmation must indicate which of the following?
1. Whether the trade was made an an agency transaction 2. Whether the sale was made from the dealer's inventory 3. The amount of the dealer's markup or markdown 4. The location of the trust indenture |
Answer: 1 & 2
MSRB rules require that all confirmations include the firm's capacity in the trade (agent/principal). The amount of the dealer's markup or markdown on a principal trade need not be disclosed. The commission on an agency trade must be disclosed. The official statement must include the location of the trust indenture and a statement that bondholders may review if they choose. |
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A customer purchases a NY State GO bond at a discount in the secondary market. The bond matures in 10 years and is callable in 5 years at par. Under MSRB rules, the customer's confirmation will show:
A) Either the YTM or YTC. B) Both the YTM and YTC. C) YTM. D) YTC. |
Answer: C
With callable municipal bonds, the confirmation must show the lower of the YTM or YTC. For a bond bought at a discount, the YTM is lower than the YTC. |
