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Series 7 by Chapter > Municipal Debt Securities--Bond Types and Tax Treatment > Flashcards

Municipal Debt Securities--Bond Types and Tax Treatment Flashcards

1
Q

What is the net yield for an investor in the 28% tax bracket who owns an 8.5% corporate bond?

A

The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.

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2
Q

Bonds subject to the AMT will trade with a _________ yield.

A

Bonds subject to the AMT will trade with a higher yield.

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3
Q

How does the Dutch Auction set the interest rate on Auction Rate Securities?

A

It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).

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4
Q

In what covenant does the issuer pledge to keep the project in good working order?

A

Maintenance and Operation Covenant

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5
Q

What is level debt service?

A

Each year’s debt service payments remaining generally equal.

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6
Q

Municipal bond interest is exempt from __________ tax.

A

Municipal bond interest is exempt from federal tax.

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7
Q

The process of adjusting the basis of a premium bond down to par over its life is called _______________.

A

The process of adjusting the basis of a premium bond down to par over its life is called amortization.

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8
Q

The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.

A

The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called accretion.

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9
Q

What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?

A

A capital gain or loss determined by the difference between the adjusted basis and the proceeds of the sale

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10
Q

$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?

A

($9 million - $3 million) ÷ $2 million = 3:1 coverage.

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11
Q

True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.

A

True

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12
Q

A bond backed by a charge to benefiting property owners is called a __________________________.

A

A bond backed by a charge to benefiting property owners is called a special assessment bond (e.g., water/sewer system).

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13
Q

True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.

A

True

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14
Q

What does 1 mill equal?

A

$1.00 per thousand dollars of assessed value (.001 as a decimal)

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15
Q

Local general obligation bonds are backed by what type of tax?

A

Property tax (e.g., school district bonds)

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16
Q

Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?

A

Operating and Maintenance Fund

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17
Q

Define overlapping debt.

A

Debt of a municipality that is shared with another political entity (e.g., school district debt)

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18
Q

What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?

A

Since the basis must be amortized down to par, there is no capital gain or loss when a premium bond is held to maturity.

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19
Q

A __________________ is a revenue bond backed by one specific tax.

A

A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)

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20
Q

The formula for net (after-tax) yield is: __________ x (________- ________)

A

The formula for net (after-tax) yield is: Taxable Yield x (100% - Tax Bracket %)

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21
Q

What is the tax consequence if a municipal Original Issue Discount (OID) bond is sold prior to maturity?

A

A capital gain or loss determined by the difference between the adjusted basis and the proceeds on the sale

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22
Q

True or False: The credit rating of an IDR is based on the credit of the municipality.

A

False. The rating is based on the corporation making the lease payments.

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23
Q

What is a Revenue Anticipation Note (RAN)?

A

Municipal note that will eventually be paid from future federal or state subsidies

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24
Q

MIG stands for ___________________________.

A

MIG stands for Moody’s Investment Grade.

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25
Q

What is a municipal OID?

A

An Original Issue Discount (OID) bond.

26
Q

Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.

A

Accrued interest on municipal bonds is calculated using 30 days in the month and 360 days in the year

27
Q

When analyzing GO bonds, what are some important considerations? 6

A
  1. Property values,
  2. per capita income and debt,
  3. population,
  4. current debt,
  5. tax collection,
  6. unfunded pension liabilities
28
Q

An OID is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?

A

The accreted value of the bond.

29
Q

Moody’s rates municipal notes using ______, ______, ______, ______.

A

Moody’s rates municipal notes using MIG1, MIG2, MIG3, SG.

30
Q

How often will VRDOs adjust their interest rate?

A

At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.

31
Q

A muni. bond is bought at a secondary market discount and sold for a gain before maturity. What is the tax consequence?

A

The gain is taxable as ordinary income up to the accreted value, and a capital gain for any amount above that.

32
Q

What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?

A

Since the basis must be accreted up to par, there is no capital gain or loss when an OID is held to maturity.

33
Q

The maximum maturity of commercial paper is ____ days.

A

The maximum maturity of commercial paper is 270 days.

34
Q

Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?

A

Debt Service (with Operating and Maintenance first)

35
Q

What are Auction Rate Securities (ARS)?

A

Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction

36
Q

Revenue bonds are backed by ___________________ generated by ________________________.

A

Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.

37
Q

Who may issue bonds that offer interest that is triple tax-exempt?

A

Commonwealths, territories, and possessions (e.g., Puerto Rico)

38
Q

What is a Construction Loan Note (CLN)?

A

Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing

39
Q

What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?

A

The gain is taxed as ordinary income.

40
Q

Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?

A

The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%

41
Q

What condition must exist for a municipal bond’s interest to be exempt at the state and local level?

A

Investors must buy the bond from the state in which they reside.

42
Q

The formula for taxable equivalent yield is: __________ ÷ (________ - ________)

A

The formula for taxable equivalent yield is: Tax-Free Yield ÷ (100% - Tax Bracket %)

43
Q

What types of municipal bonds are most likely subject to the Alternative Minimum Tax?

A

Private Activity bonds

44
Q

What is the IRS method for accreting the basis of a bond?

A

Constant yield or constant interest method

45
Q

How is the phantom interest on an OID treated for tax purposes?

A

It is considered interest income on a municipal bond, and therefore, tax exempt.

46
Q

What bond would be issued to build a facility for a private company?

A

Industrial Development Revenue (IDR) bond

47
Q

A decision of the ___________________ created the tax exemptions for government and municipal bonds.

A

A decision of the U.S. Supreme Court created the tax exemptions for government and municipal bonds.

48
Q

How is property tax calculated?

A

Assessed value x millage rate

49
Q

How is interest on municipal bonds treated for tax purposes?

A

Federally tax-exempt, but may be subject to state and local tax

50
Q

Standard & Poor’s three ratings for municipal notes are ______, ______, ______.

A

Standard & Poor’s three ratings for municipal notes are SP-1, SP-2, SP-3.

51
Q

Debt service represents the total of all ____________ and ____________ payments.

A

Debt service represents the total of all principal and interest payments.

52
Q

To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________

A

To calculate Debt Service Coverage Ratio, the formula used is: (Gross Revenue - O/M Expenses) ÷ Debt Service

53
Q

What are some examples of tax-free money-market instruments?

A

Municipal notes and tax-exempt commercial paper

54
Q

By what types of taxes are state general obligation bonds backed?

A

Income, sales, or gasoline tax, but also licensing fees and fines.

55
Q

What is a Bond Anticipation Note (BAN)?

A

Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond

56
Q

What two sources are used to pay debt service on a double-barreled bond?

A

Revenue dollars and tax dollars

57
Q

True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.

A

True

58
Q

What is a Grant Anticipation Note (GAN)?

A

Municipal note issued in anticipation of receiving government funding in the form of a grant

59
Q

General Obligation (GO) bonds are backed by the issuer’s ________________________ and their ability to levy _______.

A

General Obligation (GO) bonds are backed by the issuer’s full faith and credit and their ability to levy taxes.

60
Q

What is a Tax Anticipation Note (TAN)?

A

Municipal note issued in anticipation of future real estate taxes

61
Q

True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.

A

True

Series 7 by Chapter (24 decks)

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