Deck 24: Municipal Securities Markets

Question 1

Investors in municipal bonds whose primary interest is in opportunities to benefit from leveraged strategies that seek to generate capital gains include:

A) Hedge funds.
B) Arbitrageurs.
C) Mutual funds.
D) a and b only.
E) All of the above.

Answer 1

a and b only.

Question 2

Municipal securities are issued for various purposes including:

A) Anticipation of the receipt of funds from taxes.
B) Financing long-term capital projects.
C) Financing long-term budget deficits that arise from current operations.
D) b and c only.
E) All of the above.

Answer 2

All of the above.

Question 3

General obligations bonds are secured by:

A) The issuer's general taxing power.
B) A pledge of special fees/operating revenue from the service provided.
C) FDIC insurance.
D) a and b only.
E) All of the above.

Answer 3

a and b only.

Question 4

Revenue bonds have a security structure where the bond issuer:

A) Pledges to the bondholders the revenues generated by the operating projects financed.
B) Secures the bonds by its unlimited taxing power.
C) Collateralizes the bonds with specific assets.
D) All of the above.
E) None of the above.

Question 5

Municipal securities issued for periods up to three years are considered:

A) Long term.
B) Intermediate term.
C) Short term.
D) All of the above.
E) None of the above.

Question 6

Municipal bonds may be retired with a:

A) Serial maturity structure.
B) Term maturity structure.
C) Combination of the serial and term maturity structures.
D) None of the above.
E) All of the above.

Question 7

To evaluate general obligation bonds, commercial rating companies assess:

A) Information on the issuer's debt structure and overall debt burden.
B) The issuer's ability and political discipline to maintain sound budgetary policy.
C) The issuer's overall socioeconomic environment.
D) Local taxes and intergovernmental revenues available to the issuer.
E) All of the above.

Question 8

Regarding the default risk associated with municipal bonds:

A) Over the past 30 years there have been relatively few defaults.
B) From 1940 to the present they have demonstrated very little default risk.
C) They historically had little default risk but it has increased dramatically in the past three decades.
D) Their default risk is constantly fluctuating.
E) None of the above.

Question 9

The risk that the federal income tax rate will be reduced, resulting in a decline in the value of municipal bonds, is called:

A) Political risk.
B) Tax risk.
C) Government risk.
D) Tax law risk.
E) None of the above.

Question 10

Most states mandate that general obligation issues be marketed through:

A) Private placement.
B) Competitive bidding.
C) Best efforts underwriting.
D) Direct negotiations.
E) None of the above.

Question 11

Usually, state and local governments require a competitive sale to be announced in a recognized financial publication, such as:

A) Barron's.
B) The Bond Buyer.
C) Institutional Investor.
D) Financial Analyst Journal.
E) None of the above.

Question 12

Municipal bonds are traded in the:

A) Over-the-counter market.
B) Private market.
C) Third market.
D) Dutch auction market.
E) None of the above.

Question 13

Municipal bonds are generally traded and quoted in terms of the:

A) Basis price.
B) Yield-to-maturity.
C) Yield-to-call.
D) b and c only.
E) All of the above.

Question 14

Congress has specifically exempted municipal securities from:

A) The registration requirements of the Securities Act of 1933.
B) The periodic reporting requirements of the Securities Exchange Act of 1934.
C) Antifraud provisions applicable to municipal securities.
D) a and b only.
E) All of the above.

Question 15

A general obligation bond is said to be double-barreled when it is secured by:

A) The issuer's general taxing power.
B) Certain identified fees, grants, and special charges provide additional revenues from outside the general fund.
C) A specified number of fixed assets.
D) a and b only.
E) All of the above.

Question 16

If the escrow is properly structured, prerefunded bonds are among the safest of all municipal securities since they are collateralized by:

A) U.S. government obligations.
B) State general obligation bonds.
C) The general taxing power of the issuer.
D) Insurance policies.
E) None of the above.

Question 17

Revenue bonds are debt obligations of municipalities that are backed by tax revenues.

Question 18

A serial maturity structure requires that a portion of the debt obligation be retired each year.

Question 19

Commercial rating companies evaluate the credit risk associated with municipal securities.

Question 20

Antifraud provisions apply to offerings of municipal securities.

Question 21

State and local governments require competitive bidding on all municipal securities.

Question 22

Tax-backed debt includes airport bonds, public power bonds, and sports complex bonds.

Question 23

Grant anticipation notes, revenue anticipation notes, and tax-exempt commercial paper are examples of short-term municipal securities.

Question 24

For a tax-exempt municipal security, the higher the marginal tax rate, the less valuable the tax-exemption feature will be.

Question 25

The difference in yield between tax-exempt securities and Treasury securities is typically measured not in percentage terms, but in basis points.

Question 26

A tax risk associated with municipal bonds is that a tax-exempt issue may be eventually declared by the IRS to be taxable.

Question 27

Describe the risks specific to investments in municipal securities.

Question 28

Explain the yield relationship between municipal securities and taxable bonds.