Series 7 Municipal Bonds
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General Obligation (GO) bonds are backed by the issuer's _____ and their ability to levy _____
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Full faith and Credit Taxes
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By what types of taxes are state general obligation bonds backed
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Income, Sales, or gasoline tax, but also licensing fees and fines
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local general obligation bonds are backed by what type of tax
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property tax (e.g., school district bonds)
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How is property tax calculated
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assessed value x millage rate
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What does 1 mill equal?
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$1.00 per thousand dollars of assessed value (.001 as a decimal)
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When analyzing GO bonds, what are some important considerations?
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Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities
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Define overlapping debt.
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Debt of a municipality that is shared with another political entity (e.g., school district debt)
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True or False: An increase in unfunded pension liabilities is a negative sign of the municipality's creditworthiness.
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True
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Revenue bonds are backed by ___________________ generated by ________________________.
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Revenue bonds are backed by specific revenue (user fees) generated by a project or facility.
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Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?
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Operating and Maintenance Fund
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Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?
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Debt Service (with Operating and Maintenance first)
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Debt service represents the total of all ____________ and ____________ payments.
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Debt service represents the total of all principal and interest payments.
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What is level debt service?
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Each year's debt service payments remaining generally equal
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What two sources are used to pay debt service on a double-barreled bond?
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Revenue dollars and tax dollars
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To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________
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(Gross Revenue - O/M Expenses) ÷ Debt Service
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True or False: If revenue falls short, payments on moral obligation bonds only begin with legislative approval.
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True
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A __________________ is a revenue bond backed by one specific tax.
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special tax bond
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A bond backed by a charge to benefiting property owners is called a __________________________.
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special assessment bond
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What bond would be issued to build a facility for a private company?
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Industrial Development Revenue (IDR) bond
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True or False: The credit rating of an IDR is based on the credit of the municipality.
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False. The rating is based on the corporation making the lease payments.
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What types of municipal bonds are most likely subject to the Alternative Minimum Tax?
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Private Activity bonds
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Bonds subject to the AMT will trade with a _________ yield.
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higher
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What is a Bond Anticipation Note (BAN)?
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Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
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What is a Tax Anticipation Note (TAN)?
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Municipal note issued in anticipation of future real estate taxes
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What is a Revenue Anticipation Note (RAN)?
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Municipal note that will eventually be paid from future federal or state subsidies
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What is a Grant Anticipation Note (GAN)?
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Municipal note issued in anticipation of receiving government funding in the form of a grant
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What is a Construction Loan Note (CLN)?
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Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
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What are some examples of tax-free money-market instruments?
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Municipal notes and tax-exempt commercial paper
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The maximum maturity of commercial paper is ____ days.
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270
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How often will VRDOs adjust their interest rate?
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At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
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MIG stands for ___________________________.
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Moody's Investment Grade.
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Standard & Poor's three ratings for municipal notes are ______, ______, ______.
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SP-1, SP-2, SP-3.
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True or False: MBIA, FGIC, and AMBAC protect customers against broker-dealer bankruptcy.
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False. MBIA, FGIC, and AMBAC insure municipal bond offerings, while SIPC protects against broker-dealer bankruptcy.
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Do S&P and AM Best insure municipal bonds?
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No, they provide bond ratings.
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Municipal bond interest is exempt from __________ tax.
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Municipal bond interest is exempt from federal tax.
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What condition must exist for a municipal bond's interest to be exempt at the state and local level?
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Investors must buy the bond from the state in which they reside.
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Who may issue bonds that offer interest that is triple tax-exempt?
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Commonwealths, territories, and possessions (e.g., Puerto Rico)
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The formula for taxable equivalent yield is: __________ ÷ (________ - ________)
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Tax-Free Yield ÷ (100% - Tax Bracket %)
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The formula for net (after-tax) yield is: __________ x (________- ________)
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Taxable Yield x (100% - Tax Bracket %)
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Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.
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30 360
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______________________ bonds would most likely require voter approval.
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General Obligation (GO)
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Which bond would most likely require a feasibility study to be issued?
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Revenue Bond
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How is the underwriter determined for a Negotiated Sale?
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The issuer selects the underwriter it would like to work with, and they negotiate the offering terms.
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How is the underwriter determined for a Competitive Sale?
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The issuer invites syndicates to bid on the issue, with the best bid (lowest interest cost) winning the competition.
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What advertises that municipal bonds are available and invites underwriters to bid on a new competitive issue?
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Notice of Sale
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Where can Notices of Sale be found?
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In The Bond Buyer (The Daily Newspaper of Public Finance)
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The document underwriters submit to issuers when bidding on a competitive issue is called the ______________________.
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Official Bid Form.
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When bidding on a new issue, what will underwriters first determine?
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Reoffering Yield
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At bid submission, does Net Interest Cost (NIC) or True Interest Cost (TIC) take into account the time value of money?
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True Interest Cost (TIC), also called the Canadian Method
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True or False: The legal opinion addresses the creditworthiness of an issue.
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False. Legal opinions address the legality (authority/validity) of the issue and the tax exemption of the interest.
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If a bond counsel has no concerns related to the new offering, the counsel may render an ______________ opinion.
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unqualified
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What type of opinion will a bond counsel render if the legality of the issue is in question or a lawsuit is pending?
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Qualified
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What is the difference between what the syndicate pays the issuer for the new issue and the public offering price?
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The underwriting spread
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Name the three components of the spread for a bond offering.
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1. Manager's fee 2. Additional takedown 3. Sales concession
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What is the spread minus the manager's fee?
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The total takedown
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The total takedown is made up of ____________ + _____________.
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Additional takedown + Sales concession.
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What would a member of the syndicate (not the manager) earn for selling bonds?
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The total takedown
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A BD that is a part of the selling group (not a syndicate member) would only be entitled to the ____________________.
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sales concession.
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Why will the manager prioritize orders for the purchase of bonds sold through the syndicate?
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To give the maximum benefit to the entire syndicate as a group versus any one particular member
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List the priority of orders from first to fourth.
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1. Presale orders 2. Group net orders 3. Designated orders 4. Member orders
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What orders are placed prior to the actual awarding of the issue to the syndicate?
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Presale orders
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_________ orders are those in which only one member earns the total takedown.
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Member
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What orders benefit the entire syndicate by percentage of liability?
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Group net orders
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____________ orders are given to a syndicate and identify two or more members (not all) to receive credit for the sale.
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Designated
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What is the disclosure document, similar to a prospectus, that is used for municipal bonds?
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Official Statement
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Is it mandatory for a municipal issuer to prepare an Official Statement?
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No, but if one has been prepared, the MSRB requires BDs to distribute it.
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True or False: MSRB rules regulate the municipal activities of BDs, banks, and the employees of these institutions.
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True. The MSRB also regulates municipal advertising.
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What is the purpose of a Tombstone Ad?
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It calls attention to the new issuance of securities and members of the syndicate.
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Who is responsible for the formulation and interpretation of rules for the municipal industry?
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The MSRB
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Does the MSRB have the authority to enforce its own rules?
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No. The MSRB has no enforcement authority.
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Who enforces MSRB rules?
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BD Enforcement: SEC or FINRA and Bank Dealer Enforcement: FRB, FDIC, or the Comptroller of the Currency
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Those qualified as municipal RRs (Series 52) may sell, trade, or underwrite municipals, but may not ____________ sales.
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supervise
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What is the appropriate registration designation to supervise the municipal activity for a BD?
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Municipal Securities Principal (Series 53)
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Before dealing with the public, municipal securities representatives must serve a ____ day apprenticeship period.
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90
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Series ____ or Series _____ will qualify an individual to sell municipal securities.
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Series 7 or Series 52
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What are the limitations while serving the MSRB's apprenticeship period?
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No dealing with customers (only with other municipal professionals) and no commissions (only straight salary)
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True or False: Municipal securities representatives may sell municipal bond funds.
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False. Municipal representatives may only sell individual municipal bonds.
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What is the document that establishes the agreement between the issuer and the underwriter?
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Underwriting Agreement
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If a bid is unsuccessful, when must the manager return the syndicate member's portion of the good-faith deposit?
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Within 2 business days of its return from the issuer
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What is exempt from the 5% policy?
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Trading of municipal bonds, new issues, registered secondary offerings, and mutual funds
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If a BD wants to sell municipal bonds and have significant exposure to different bids, who should it contact?
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A Broker's Broker
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Where can Visible Supply figures and the Placement Ratio for municipals be found?
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The Bond Buyer
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Are Visible Supply figures compiled daily or weekly?
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Daily
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Is the Placement Ratio compiled daily or weekly?
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Weekly
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The Visible Supply figure indicates the number of municipals expected to reach the market within the next ____ days.
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30
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True or False: The Visible Supply figure will only include municipal bonds.
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False. The Visible Supply figure shows municipal bonds or notes being offered on a negotiated or competitive basis.
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What does the Placement Ratio indicate?
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The number of bonds that were sold during the week compared to what was available for sale (the demand side)
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The 20 GO Bond Index is composed of ____ GO bonds with ____-year maturities.
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The 20 GO Bond Index is composed of 20 GO bonds with 20-year maturities.
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The average rating for the 20 GO Bond Index is ____________.
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AA or Aa2.
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True or False: The 11 GO Bond Index is composed of 11 of the 20 bonds in the 20 GO Bond Index.
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True
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Is the average credit rating of the 11 GO Bond Index higher or lower than the 20 GO Bond Index?
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Higher; the average is AA+/Aa1.
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The index showing the average yield on 25 revenue bonds with 30-year maturities is called the ______________________.
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Revenue Bond Index.
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Is the average credit rating of the Revenue Bond Index higher or lower than the GO Bond Indexes?
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Lower; the average is A+/A1.
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Any quote qualified by the terms \"subject\", \"workout,\" or \"nominal\" is not considered a ______ quote.
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firm
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List some of the information to be included on municipal dealer-to-dealer confirmations.
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Description, call features, yield/price, final dollar amount, confirming/contra party, trade/settlement dates, CUSIP #
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When do municipal bond trades settle?
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3 business days after the trade date (T+3)
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When will a cash trade for a municipal bond settle?
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Same day
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For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?
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Yes. A Legal Opinion must be imprinted or attached (unless identified as ex-legal).
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For municipal bearer bonds, what factors determine good delivery?
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All unpaid coupons attached and the bonds denominated in $1,000 or $5,000 increments
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For municipal registered bonds, what factors determine good delivery?
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Proper assignment and the bonds denominated from $1,000 to $100,000 in $1,000 increments
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______________ is the return of municipal bonds that were originally accepted for delivery.
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Reclamation
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____________ is the buyer's refusal to accept the delivery of municipal bonds.
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Rejection
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What is created when a BD employee has influence over the debt service of an issuer (e.g., an employee is a mayor)?
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Control relationship
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If a control relationship exists, how may the relationship be disclosed?
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Orally, before a trade, and then in writing, at or before settlement
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True or False: Disclosure is not needed if a control relationship exists and bonds are placed in discretionary accounts.
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False. To place those bonds in the client's account, specific written customer authorization is required.
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Who supervises a firm's municipal activities and provides account approval, transaction review, and complaint handling?
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Municipal Securities Principal (Series 53)
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$_____ is the MSRB gift rule limitation.
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$100
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What relationship is created when a BD receives a fee for giving advice to a municipality regarding a new issue?
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Financial Advisory relationship
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Put the following four types of orders in the correct priority: Group Net, Member, Presale, Designated
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1) Presale 2) Group Net 3) Designated 4) Member (Remember: P, G, D, M)
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The ___________________ has the authority to change the priority of orders.
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syndicate manager
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True or False: Syndicate managers may change the priority of orders if justifiable and in the syndicate's best interest.
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True
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Who is the associated person who primarily engages in or supervises municipal securities business?
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Municipal Finance Professional (MFP)
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Political contribution rules allow MFPs who may vote for a candidate to contribute a maximum of $_____ (per election).
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$250
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Political contribution rules allow MFPs NOT able to vote for a candidate to contribute a max. of $___ (per election).
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$0
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What is the penalty for political contributions that violate the rule?
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A two-year ban on obtaining negotiated underwriting business from the issuer
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Are BDs who violate the political contribution rule banned from obtaining competitive underwriting deals from issuers?
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No, since the deal is obtained on the merits of the bid.
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What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?
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The gain is taxed as ordinary income.
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What is a municipal OID?
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An Original Issue Discount (OID) bond.
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What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?
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Since the basis must be accreted up to par, there is no capital gain or loss when an OID is held to maturity.
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The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.
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accretion
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What is the IRS method for accreting the basis of a bond?
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Constant yield or constant interest method
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What is the tax consequence if a municipal Original Issue Discount (OID) bond is sold prior to maturity?
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A capital gain or loss determined by the difference between the adjusted basis and the proceeds on the sale
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An OID is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?
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The accreted value of the bond.
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The process of adjusting the basis of a premium bond down to par over its life is called _______________.
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amortization
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How is the phantom interest on an OID treated for tax purposes?
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It is considered interest income on a municipal bond, and therefore, tax exempt.
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What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?
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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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What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?
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A capital gain or loss determined by the difference between the adjusted basis and the proceeds of the sale
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How is interest on municipal bonds treated for tax purposes?
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Federally tax-exempt, but may be subject to state and local tax
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Interest paid on bonds issued by U.S. territories or possessions is ___________________.
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triple-tax-exempt
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What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?
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Triple-tax-exempt interest
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A decision of the ___________________ created the tax exemptions for government and municipal bonds.
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U.S. Supreme Court
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What information would the manager of a municipal underwriting provide in the Syndicate Letter?
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Underwriting type (negotiated/competitive), amount, allocation, priority of orders, type of account (eastern/western)
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A B/D has a financial advisory relationship with an issuer. May it underwrite the issuer's bonds on a competitive basis?
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No. Rule G-23 bans an advisor from acting as an underwriter for the same issuer on a negotiated or competitive basis.
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A B/D has a financial advisory relationship with an issuer. May it underwrite the issuer's bonds on a negotiated basis?
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No. Rule G-23 bans an advisor from acting as an underwriter for the same issuer on a negotiated or competitive basis.
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Moody's rates municipal notes using ______, ______, ______, ______.
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MIG1, MIG2, MIG3, SG.
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True or False: The Syndicate Letter is also referred to as the Agreement Among Underwriters.
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True
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Is an official statement or preliminary official statement considered retail communication?
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No. However, a summary or abstract of an official statement is considered retail communication.
