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Muni Debt
Municipal debt characteristics
18
Finance
Post-Graduate
04/28/2013

Additional Finance Flashcards

 


 

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Term
A municipal dealer offers bonds to another dealer "firm for one-half hour with a five minute recall". This means that:
Definition
II   The selling dealer cannot change the price for one-half hour unless the buying dealer is recontacted
III   The buying dealer can solicit orders for the bonds before actually purchasing them
Term
Which of the following statements is true regarding quotes for municipal bonds found in Bloomberg?
Definition
All quotes shown in Bloomberg are subject to prior sale or change in price
Term
A municipal dealer who solicits a "Bid Wanted":
Definition

 

II   need not accept the first bid received

 

IV   need not have purchased the bonds prior to soliciting the bids

 

A municipal dealer can trade without physically having the position. If a dealer is requesting bids (that is, the dealer wishes to sell bonds), the dealer must simply intend to deliver those bonds by settlement. There is no requirement that the dealer must have the bonds, or must have purchased the bonds, prior to soliciting bids. Furthermore, there is no requirement that the dealer accept the first bid. The dealer will accept the highest bid received (if the bid amount is acceptable).

Term
150 basis points are equal to:
Definition

One basis point is .01% of interest. 100 basis points equals 1% of interest. 150 basis points equals 1.50%, which is the same as $15.00 per $1000 face amount on a bond.

 

$15.00 per $1,000

 

1.5%

Term
A basis quote for a $10,000 municipal bond with one year left to maturity has just been raised by 20 basis points. The bond's change in price will be:
Definition

$20.00 decrease

 

1 Basis Point = .01% = $.10 therefore 20 basis points equals .20% of par

 

.20% = .002 x $10,000 par = $20.

 

If interest rates rise by 20 basis points, this bond with 1 year to maturity should decrease in value by $20. Also note that this type of question can only be asked for a bond with 1 year to maturity. If there are many years to maturity, then discounted cash flow calculations are required, which are not tested.

 

Term

A 10 year 7% municipal bond, quoted on a 5.00 basis, is priced at 104. A 10 year 6% municipal bond, quoted on a 5.00 basis, is priced at 101. What is the price of a 10 year, 6.40% municipal bond, quoted on a 5.00 basis?

Definition

his question is asking for the following:

7% Coupon 5.00 Basis 104
6.4% Coupon 5.00 Basis ?
6% Coupon 5.00 Basis 101

 

The difference in price between the 6% and 7% bonds is 3 points. The 6.40% bond is 40% of the way from 6%. 40% x 3 points = 1.20 point price increment from the 6% price. 101 + 1.20 = 102.20 price for the 6.40% bond.

 

.4*3=1.2 so 101+1.2=102.2

 

Term

A municipal bond dealer quotes 10 year 4% Revenue bonds at 95 1/2 - 97. The dealer's spread per $1,000 is:

Definition

$15.00

 

150 Basis Points

 

The spread is 1.5 points, which is 1 1/2% of $1,000 par, which equals $15. $15 is the same as 150 basis points, since each basis point equals $.10.

 

Term

A municipal bond dealer buys 100M of 30 year non-callable 9% General Obligation bonds at par less 1 1/2 points. After holding the bonds in inventory for a week, the dealer reoffers the bonds on a 9.10 basis. The dealer's approximate profit or loss on this transaction is:

 


A.  loss of $150   [image] B.  loss of $400     C.  gain of $150   [image] D.  gain of $400
Definition

Gain of $400 

 

100-1.5=98.5

 

.009 (nominal yield) /.0091  = .989

 

.989-.985=0.004

 

.004*100,000= 400

 

The dealer purchases these bonds at par less 1 1/2 points, so the bonds were purchased at 98.5. Since these 9% coupon bonds were reoffered on a 9.10 basis, they must have been reoffered at a discount price. Since these are long term bonds (30 years), we can approximate the reoffering price by dividing 9% (nominal yield) by the 9.10 reoffering yield. 9/9.10 = .989. Thus, the bonds were reoffered at an approximate price of .989% of par (note, this only works for long term maturities - not short term maturities).

 

The bonds were reoffered at a price that is .004% higher than the cost to the dealer (.985 cost versus .989 reoffer price). .004% x $100,000 face amount = $400 gain on the transaction. Note that "100M" of bonds is $100,000 face amount, where M = $1,000. 

Term
Accrued interest on municipal issues is calculated on which basis?
Definition

Accrued interest on municipal bonds is calculated on a 30 day month/360 day year basis.

 

[image] A. 

30/360 

Term

A customer purchases 5M of New York 8% G.O. bonds, maturing in 2032 at 90. The interest payment dates are Jan 1st and Jul 1st. The trade took place on Tuesday, February 1st. How much accrued interest will the customer be required to pay the seller?

Definition

$36.67

 

33 Days of Interest (30 in Jan plus three days Feb b/c S/D is the third of Feb)

 

33*80*5= 13,200

 

13,200/360 = 36.67

Term

A customer buys a new municipal issue from an underwriter on Thursday, January 15th, with settlement taking place on Tuesday, January 20th. The bond is dated January 1. How many days of accrued interest must be paid by the customer to the underwriter?

Definition

Interest accrues from the dated date on a new issue up to, but not including the date when the first trade settles.

 

Since settlement is on January 20th, interest accrues through the 19th. Counting from the January 1st dated date through the 19th, 19 days of accrued interest are payable from the buyer of the bond to the seller (the underwriter in this case).

Term

A customer wishes to determine the call provisions on a municipal bond that he currently holds. Which source provides this information?

Definition

EMMA

 

acronym for "Electronic Municipal Market Access" - the MSRB's public web portal for information about the municipal market, including Official Statements for new issues and real-time bond trade reports.

Term

If a bond is trading at a premium, price volatility is greatest for a bond having:

 

coupon rates slightly above the market interest rate

 

long term maturities

Definition

The basic truths about bond price volatility are:

The lower the coupon rate (the same as saying the lower the price of the bond), the greater the bond price volatility;

The longer the maturity, the greater the bond price volatility.

Bonds trading at low premiums have a lower price than bonds trading at high premiums.

 

Thus, of the choices given, a bond with a low premium (a coupon only slightly higher than the market interest rate) and a long maturity would have the greatest price volatility.

Term
All of the following insure municipal bonds
Definition

 FGIC - Financial Guaranty Insurance Corporation;

BIGI - Bond Investors Guaranty Insurance Corporation; and

AMBAC - American Municipal Bond Assurance Corporation; all insure municipal bonds.

Term

A customer residing in California that is in the 30% Federal tax bracket and the 10% State tax bracket wishes to make a bond investment with a minimum 10-year life. The customer also wants a high level of safety. The following 10-year bonds are available:

 

 AAA Corporate Bond                       6.50

U.S. Treasury Bond                          4.50

AAA Federal Home Loan Bank Bond5.00

AAA California Bond                        4.00

Definition
  • Treasury/Agency Issues: Interest is subject to Federal Income tax, but is exempt from State and Local tax
  • Municipal Issues: Interest is exempt from Federal Income tax, and exempt from State and Local tax when purchased by a resident of that state
  • Corporate Issues: Interest is subject to Federal Income tax, and to State and Local tax

If the customer buys the Treasury bond yielding 4.5%, 30% of the yield will go to the Federal Government, so the after-tax yield is (.7 x 4.50%) = 3.15%.

If the customer buys the Federal Home Loan Bank bond yielding 5%, 30% of the yield will go to the Federal Government, so the after-tax yield is (.7 x 5.00%) = 3.50%.

If the customer buys the Corporate bond yielding 6.50%, 30% of the yield will go to the Federal Government and 10% to the State Government, so the after-tax yield is (.6 x 6.50%) = 3.90%.

If the customer buys the Municipal bond yielding 4.00%, there is no tax on the income received at either the Federal or State level, so the after-tax yield is 4.00%.

 

Term

A bank qualified municipal issue is one which:

 

qualifies for an 80% deduction of its related interest carrying expenses by the bank

Definition

A "bank qualified" municipal issue is an issue of $10,000,000 or less that has been designated by the issuer as a "bank qualified issue". To be bank qualified, it must be a public purpose (not private purpose issue). Any bank that buys the issue receives a tax benefit that is not available on all other municipal investments. The bank can deduct 80% of the interest expense it incurs on deposits used to fund the purchase of the bonds, while the interest income from the municipal issue is not taxable to the bank. This is sometimes termed the 80/20 rule. If an issue is not bank qualified, then none of the interest expense that the bank incurs on deposits used to fund the purchase of the bonds can be deducted, which is logical since the interest income from the bonds is exempt from Federal taxation.

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