Question 1

What is the name for the rate of discount from the list price that is paid to a municipal securities underwriting group member for its sales participation?

Accepted Answer

takedown. The takedown is an additional allowance on bonds sold by a member.

Question 2

Bubba buys a 5% municipal bond maturing in 15 years that is trading at a market price of 85. What is the nominal yield?

Accepted Answer

5.00%. The nominal yield is the coupon rate on the bond.

Question 3

Bubba buys a 5% municipal bond maturing in 15 years that is trading at a market price of 85. What is the current yield?

Accepted Answer

5.88%. The current yield is the annual interest divided by the price. The bond will pay $50 of interest per year ($1,000 face amount times 5%). Dividing by the price of $850 equals 5.88%.

Question 4

Bubba buys a 5% municipal bond maturing in 15 years that is trading at a market price of 85. What is the yield to maturity using the "rule of thumb" method?

Accepted Answer

6.49%. Divide the discount from par value of $150 ($1,000 - $850) by the number of years to maturity (15) to determine the annual discount. Add the result of $10 to the annual interest ($50) to determine the total annual return. Divide the result of $60 by the average of the current price (85) and par (100). The result is 60 divided by 92.5, which equals 6.49%.

Question 5

Which bond buyer index reflects the lowest average yield for municipal bonds?

Accepted Answer

the 11-bond index. This index is the highest quality index and thus reflects the lowest average yield.

Question 6

What does the bond buyer placement ratio represent?

Accepted Answer

the amount of municipal bonds distributed weekly as a percentage of each week's new issue accounts of more than $1 million. This is the definition of the ratio.

Question 7

How much money is a concession of 3/8 worth for one municipal bond?

Accepted Answer

$3.75. Three-eights of a $1,000 bond with a par price of 100.00 equals $3.75.

Question 8

Bubba is concerned about the liquidity of a possible municipal bond purchase. He is therefore probably most interested in the rating supplied by which of the following?

Accepted Answer

White's. White's ratings are based on trading market data as opposed to the financial data of the issue, which is used by Moody's as well as S&P.

Question 9

Which of the following forms of underwriting is least likely for an offering of municipal bonds?

Accepted Answer

best efforts. A best efforts deal least likely for a municipal securities offering. It is most often associated with small corporate stock or limited partnership offerings. Municipal securities are usually competitive bid or negotiated. Both of these types are firm commitment.

Question 10

Big Guns Municipal Bond Dealer Corporation buys 100M of 7% 20-year GO bonds at par. The bonds are marked up and immediately re-offered for sale. Which of the following re-offering prices would probably be deemed excessive?

Accepted Answer

5.00% net. The other quotes indicate moderate markups over cost. A quote of 5% net indicates a large markup and a price not "reasonably related to the market". The dollar price would be about $125, a 25% markup over the dealer's cost.

Question 11

Municipal bonds would be least attractive as an investment for which of the following?

Accepted Answer

a pension fund. Since the pension fund does not pay income tax, the tax benefits of the municipal bonds are not realized.

Question 12

If a municipality has funds available to make a partial call of an issue of outstanding serial bonds, which bonds should be called first?

Accepted Answer

the longest maturity. These bonds are called first because the municipality will save the interest costs for the longest period of time.

Question 13

Which of the following is least relevant in evaluating the safety of a general obligation bond?

Accepted Answer

total debt service as a percentage of net operating revenue. This ratio is applicable to revenue bonds but not general obligation bonds. The other choices are all used in measuring credit risk in a GO bond.

Question 14

Municipal syndicate allocation procedures are described in which of the following?

Accepted Answer

syndicate account letter. This letter is sent by the manager of a competitive bid syndicate to the other members. The priority and other procedures, including allocation amounts, are specified in the letter. Members signify acceptance by signing the letter and returning it to the manger.

Question 15

What expression is used to describe the application of income and revenues derived from the operation of a facility financed from proceeds of a revenue bond?

Accepted Answer

flow of funds. This is the definition of the term flow of funds.

Question 16

In the distribution of a new issue, a dealer acting as an underwriter is said to have a:

Accepted Answer

firm commitment. The term underwriting means a guarantee to the issuing corporation. This is a firm commitment, unlike a best efforts offering where there is no guarantee.

Question 17

In a best efforts distribution of a new non-exempt issue, a broker/dealer:

Accepted Answer

acts as an agent for the issuer. In a best efforts offering the investment banker acts as an agent for the issuer and makes no guarantee about selling the securities.

Question 18

Assuming that the information contained in a registration statement is complete and accurate, the registration statement becomes effective:

Accepted Answer

only after the SEC specifically clears the issue in writing to the principal underwriter. The registration statement becomes effective when notice is received in writing from the SEC.

Question 19

The Bubba Corporation is offering stock to the public for the first time. The registration statement lists 150,000 shares for sale at $400 per share. The company conducts business in a 100-mile radius that includes towns in two neighboring states. Which of the following information is not required in the preliminary prospectus for this offering?

Accepted Answer

the price at which the issue is offered. The offering price is usually determined on the offering date and does not normally appear in the preliminary prospectus.

Question 20

Bubba Securities, Inc. offers 3,000,000 shares of Top Notch Manufacturing Corporation common stock at $27 per share. The next day an advertisement appears in the Wall Street Journal announcing the offering and listing the names of some of the underwriting firms. This ad is commonly referred to as a:

Accepted Answer

tombstone ad. Tombstone ads are used to announce new issues. They do not offer to buy or sell securities. They are informational only.

Quiz 2: Investment and Securities