Deck 16: Municipal Securities Markets

Question 1

Which of the below statements is FALSE?

A) Municipal bonds are issued with one of two debt retirement structures or a combination of both.
B) A serial maturity structure requires a portion of the debt obligation to be retired each year.
C) A provision that permits the early redemption of a term bond is the call privilege.
D) None of these

Answer 1

D

Question 2

A loss of the tax-exemption feature of a municipal bond will most likely cause it ________.

A) to rise in value in order to provide a yield comparable to similar taxable bonds.
B) to be called by the city.
C) to default.
D) to decline in value in order to provide a yield comparable to similar taxable bonds.

Answer 2

D

Question 3

________ have long been considered second in safety only to U.S. Treasury securities.

A) Municipal bonds
B) State bonds
C) Federal bonds
D) Foreign bonds

Answer 3

A

Question 4

Tax-backed debt includes ________.

A) general obligation debt.
B) appropriation-backed obligations.
C) debt obligations supported by public credit enhancement programs.
D) All of these

Question 5

A moral obligation is a form of credit enhancement ________.

A) provided by a city, but it is not a legally enforceable or legally binding obligation of the city.
B) provided by a city and is also a legally enforceable or legally binding obligation of the city.
C) provided by a state, but it is not a legally enforceable or legally binding obligation of the state.
D) provided by a state and is also a legally enforceable or legally binding obligation of the state.

Question 6

Although originally issued as either revenue or general obligation bonds, municipals are sometimes prerefunded and called ________.

A) structured/asset-based municipal bonds.
B) hospital revenue bonds.
C) prerefunded municipal bonds.
D) insured bonds.

Question 7

Municipal securities are issued for various purposes including ________.

A) short-term notes sold to cover permanent imbalances between outlays for expenditures and tax inflows.
B) short-term notes sold to cover seasonal imbalances between outlays for expenditures and tax inflows.
C) short-term notes to finance capital projects such as the construction of schools, bridges, roads, and airport.
D) long-term notes sold to cover seasonal imbalances between outlays for expenditures and tax inflows.

Question 8

________ are issued in anticipation of the collection of taxes or other expected revenues. The purpose of these borrowings is to even out irregular flows into the treasuries of the issuing entity.

A) BANs
B) TaxRANs
C) GANs
D) TRANs

Question 9

States and local governments can issue bonds where the debt service is to be paid from so-called "dedicated" revenues such as sales taxes, tobacco settlement payments, fees, and penalty payments. These structures, are called ________, and are also referred to as dedicated revenue bonds and structured bonds.

A) asset-backed bonds
B) public power revenue bonds
C) insured bonds
D) prerefunded bonds

Question 10

From an investor's perspective, the attractiveness of municipal securities is due to their ________.

A) tax treatment at the federal income tax level.
B) exemption from capital gains federal income tax level.
C) exemption from capital gains at the state income tax level.
D) All of these

Question 11

One concern about the credit risk of municipal securities is the ________.

A) proliferation of the high number of default.
B) proliferation in this market of innovative financing techniques to secure new bond issues.
C) proliferation in this market of stagnant financing techniques to secure new bond issues.
D) proliferation of poor executive decision-making at the national level.

Question 12

Which of the below statements is FALSE?

A) Examples of revenue bonds include: airport revenue bonds, college and university revenue bonds, hospital revenue bonds, and single-family mortgage revenue bonds.
B) The escrow fund for a prerefunded municipal bond can be structured so that the bonds to be refunded are to be called at the first possible call date or a subsequent call date established in the original bond indenture.
C) Insurance on a municipal bond is an agreement by the government to pay the bondholder any bond principal and/or coupon interest that is due on a stated maturity date but that has not been paid by the bond issuer.
D) None of these

Question 13

To evaluate general obligation bonds, the commercial rating companies assess information in four basic categories including ________.

A) information necessary to the credit analysis is an assessment of the issuer's overall socioeconomic environment.
B) information on the issuer's debt structure and overall debt burden.
C) the issuer's ability and political discipline to maintain sound budgetary policy.
D) All of these

Question 14

Municipal securities are issued ________.

A) by state and local governments only.
B) by state governments only.
C) by state and local governments and by entities that they establish.
D) by national, state, and local governments.

Question 15

Besides tax-backed debt, the other basic type of security structure is found in a ________ bond. Such bonds are issued for either project or enterprise financings where the bond issuers pledge to the bondholders the revenues generated by the ________.

A) revenue; taxing power of state and local governments
B) enterprise; operating projects financed
C) revenue; operating projects financed
D) enterprise; taxing power of state and local governments

Question 16

One category of investors dominating the municipal securities market is ________.

A) the local government.
B) the state government.
C) property and casualty insurance companies.
D) life insurance companies.

Question 17

Because a ________ requires legislative approval to appropriate the funds, it is classified as an appropriation-backed obligation.

A) general obligation debt
B) moral obligation bond
C) approved obligation bond
D) unlimited tax obligation debt

Question 18

________, in addition to being secured by the issuer's revenue, are also backed by insurance policies written by commercial insurance companies.

A) Structured/asset-based bonds
B) Airport revenue bonds
C) Prerefunded bonds
D) Insured bonds

Question 19

Tax-exempt municipal securities buyers are exposed to ________.

A) four types of tax risk.
B) the possibility that the federal income tax rate will be increased.
C) three types of tax risk.
D) the possibility that a municipal bond issued as a tax-exempt issue may be eventually declared by the Internal Revenue Service to be taxable.

Question 20

An unlimited tax general obligation debt ________.

A) has revenue sources that include corporate and individual income taxes, sales taxes, and property taxes.
B) is the weaker form of general obligation pledge because it is secured by the issuer's unlimited taxing power.
C) is said to be secured by the full faith and credit of the government.
D) is a constrained tax pledge because for such debt there is a statutory boundary on tax rates that the issuer may levy to service the debt.

Question 21

For a tax-exempt municipal security, as the marginal tax rate ________, the price of a tax?exempt municipal security will ________.

A) declines; rise.
B) declines; decline.
C) rises; rise.
D) rises; decline.

Question 22

The reasons for the exemption afforded municipal securities appear to relate to ________.

A) a desire for harmonious and cooperative relations among the various levels of government in the United States.
B) the presence of recurrent abuses in transactions involving municipal securities.
C) the greater level of naïveté of investors in this segment of the securities markets.
D) the fact that there had been many defaults by municipal issuers

Question 23

In regards to municipal bonds, which of the below statements is FALSE?

A) In the municipal bond market, several benchmark curves exist.
B) In general, a benchmark yield curve is constructed for AAA-quality-rated state general obligation.
C) In the Treasury and corporate bond markets, it is not unusual to find at different times shapes for the yield curve.
D) In general, the municipal yield curve is negatively sloped.

Question 24

A general obligation bond is secured by the issuer's limited taxing power.

Question 25

A revenue bond is issued for either project or enterprise financings where the bond issuer pledges the revenues generated by the project that is financed to the bondholders.

Question 26

In the secondary market, ________ are maintained by regional brokerage firms, local banks, and by some of the larger Wall Street firms.

A) markets for the bonds of larger issuers
B) markets for regional credits
C) markets for general names
D) markets for the debts of smaller issuers

Question 27

In regards to the yields on municipal bonds, the difference in yield between tax-exempt securities and Treasury securities is typically measured ________.

A) not in basis points but in percentage terms.
B) not in percentage terms but in basis points.
C) in either basis points or in percentage terms.
D) in spread decimals.

Question 28

In regards to the yields on municipal bonds, the yield ratio has changed over time. The ________, the more attractive the tax-exempt feature and the ________.

A) lower the tax rate; lower the yield ratio
B) higher the tax rate; higher the yield ratio
C) higher the tax rate; lower the yield ratio
D) None of these

Question 29

In regards to the primary market for municipal obligations, which of the below statements is TRUE?

A) A state or local government can market its new issue by offering bonds publicly to the investing community or by placing them privately with a small group of investors.
B) A small number of municipal obligations are brought to market each week.
C) When a private offering is selected, the issue usually is underwritten by investment bankers and/or municipal bond departments of commercial banks.
D) Public offerings may be marketed by either competitive bidding or direct negotiations with underwriters. In the direct negotiations process, the bidder submitting the lowest bid price for the security gets the right to market the debt to investors.

Question 30

Congress has specifically exempted municipal securities from both the registration requirements of the Securities Act of 1933 and the periodic reporting requirements of the ________. When there was a significant expansion of the federal securities in 2002 with the passage of the ________.

A) Municipal Exchange Act of 1934; Sarbanes-Oxley Act
B) Securities Act Amendment of 1975; Sarbanes-Oxley Act
C) Sarbanes-Oxley Act of 1995; Securities Exchange Act
D) Securities Exchange Act of 1934; Sarbanes-Oxley Act

Question 31

Taxable municipal bonds are bonds whose interest is taxed at the ________. Because there is no tax advantage, an issuer must offer a ________ than for another tax-exempt municipal bond.

A) federal income tax level; lower yield
B) state income tax level; lower yield
C) foreign income tax level; higher yield
D) federal income tax level; higher yield

Question 32

The most common types of activities for taxable municipal bonds used for financing include ________.

A) local sports facilities and investor-led housing projects.
B) advanced refunding of issues that are not permitted to be refunded because the tax law prohibits such activity.
C) underfunded pension plan obligations of the municipality.
D) All of these

Question 33

Which of the below statements is FALSE?

A) The convention for both corporate and Treasury bonds is to quote prices as a percentage of par value with 100 equal to par.
B) Municipal bonds generally are traded and quoted in terms of yield to maturity but not yield to call.
C) A bond traded and quoted in dollar prices (actually, as a percentage of par value) is called a dollar bond.
D) Actual price and trade information for specific municipal bonds is available on a daily basis at no charge.

Question 34

A reason why a municipality would want to issue a taxable municipal bond and thereby have to pay a higher yield (than if it issued a tax-exempt municipal bond) is because ________.

A) there are few activities that municipalities could finance by issuing tax-exempt municipal bonds.
B) the U.S. income tax code imposes restrictions on arbitrage opportunities that a municipality can realize from its financing activities.
C) municipalities view their potential investor base as solely U.S. investors.
D) All of these

Question 35

In the municipal bond market, an odd lot of bonds is ________ or less in par value for retail investors. For institutions, anything below ________ in par value is considered an odd lot.

A) $125,000; $200,000
B) $25,000; $100,000
C) $50,000; $100,000
D) $50,000; $200,000

Question 36

Because of the tax-exempt feature of municipal bonds, the yield on municipal bonds ________ that on Treasuries with ________.

A) is equal to; the same maturity
B) is greater than; the same maturity
C) is less than; the same maturity
D) None of these

Question 37

In the secondary market, ________ are supported by the larger brokerage firms and banks, many of whom have investment banking relationships with these issuers.

A) markets for the bonds of larger issuers
B) markets for local credits
C) markets for specific names
D) markets for the debts of smaller issuers

Question 38

There are two types of municipal securities: tax-backed debt and revenue bonds.

Question 39

Which of the below statements is TRUE?

A) Congress passed the Securities Act Amendment of 1975 to broaden federal regulation in the market for municipal debt.
B) Securities Act Amendment of 1975 brought brokers and dealers in the municipal securities market, including banks that underwrite and trade municipal securities.
C) The Securities Act Amendment of 1975 requires municipal issuers to comply with the registration requirement of the 1933 act.
D) When the SEC formally approved the first bond disclosure rule, the disclosure rule had several exemptions.

Question 40

In regards to the primary market for municipal obligations, which of the below statements is FALSE?

A) Depending on how that the debt is marketed, the municipal unit prepares an official statement describing its financial situation and the terms of the issue.
B) Most states mandate that general obligation issues be marketed through competitive bidding, but generally this is not necessary for revenue bonds.
C) Usually, state and local governments require a competitive sale to be announced in a recognized financial publication, such as The Bond Buyer, which is a trade publication for the municipal bond industry.
D) The Bond Buyer provides information on upcoming competitive sales and most negotiated sales, as well as the results of previous weeks.

Question 41

The Bond Seller provides information on upcoming competitive sales and most negotiated sales, as well as the results of previous weeks.

Question 42

A tax risk associated with investing in municipal bonds is that a tax-exempt issue may be eventually declared by the Internal Revenue Service to be taxable.

Question 43

To evaluate general obligation bonds, the commercial rating companies assess information in four basic categories. Describe two of these categories.

Question 44

The factors used to determine a rating for a general obligation bond are different from those used for a revenue bond.

Question 45

Dealer spreads depend on several factors. For the retail investor, the dealer spread rarely exceeds one-half of one point ($25 per $5,000 of par value).

Question 46

The debt retirement structure for a municipal bond can be a serial maturity structure but not a term maturity structure.

Question 47

There are two types of tax risk to which tax-exempt municipal securities buyers are exposed. Describe one of these two types.

Question 48

Describe an insured bond. In your description point out its backing, the nature of its agreement, and its term.

Question 49

A tax risk associated with investing in municipal bonds is that the highest marginal tax rate will be reduced, resulting in a rise in the value of municipal bonds.

Question 50

The investor in a municipal security is not exposed to credit risk.

Question 51

The investors in taxable municipal bonds are investors who view them as alternatives to corporate bonds.

Question 52

In the Treasury but not the corporate bond markets, it is not unusual to find at different times shapes for the yield curve.

Question 53

Specifically speaking, the difference in yield between tax-exempt securities and Treasury securities is measured as the percentage of the yield on a municipal security relative to a comparable Treasury security and is called the yield ratio.

Question 54

In a competitive process, the bidder submitting the highest bid price for the security gets the right to market the debt to investors.

Question 55

Commercial rating companies evaluate the credit risk associated with municipal securities but do not express the results of their analysis in the form of rating categories.

Question 56

Municipal notes are issued for periods up to two years and represent temporary borrowings by states, local governments, and special jurisdictions.

Question 57

Municipal bonds generally are traded and quoted in terms of yield (yield to maturity or yield to call). The price of the bond in this case is called a basis price.

Question 58

When bonds are issued outside of the United States, the investor benefits from the tax-exempt feature.

Question 59

The Municipal Securities Rulemaking Board (MSRB) has no enforcement or inspection authority.

Question 60

Congress passed the Securities Act Amendment of 1975 to narrow federal regulation in the market for municipal debt.

Question 61

Cite two reasons for the exemption afforded municipal securities.

Question 62

Give two reasons why a municipality would want to issue a taxable municipal bond and thereby have to pay a higher yield than if it issued a tax-exempt municipal bond?

Question 63

Contrast the yield on municipal bonds with that on Treasuries.

Question 64

Briefly explain the convention for quoting corporate bonds,Treasury bonds, and municipal bonds.

Question 65

What is The Bond Buyer.