manchester88

Which of the following statements about municipal bonds is least accurate?

A) A municipal bond guarantee is a form of insurance provided by a third party other than the issuer.

B) Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

C) Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

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General obligation bonds are backed by the full faith, credit, and taxing power of the issuer.

manchester88

Which of the following statements concerning municipal bonds is NOT correct?

A) Before-tax yields on municipal bonds are usually lower than before-tax yields on Treasury bonds.

B) Municipal bonds have lower risk than Treasury bonds because of their lower yield.

C) The vast majority of municipal bonds sell at lower yields because their bond interest is exempt from federal income tax.

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Treasury bonds are considered default free and have the least amount of risk. After-tax yields are highest for individuals in the highest tax bracket who benefit the most from the municipal bond’s tax-exempt status. Before tax yields on municipal bonds are lower due to their tax shield.

manchester88

Which of the following statements about fixed income securities is least accurate?

A) Coupon interest and capital gains from municipal bonds are tax exempt at the federal level.

B) The main innovation of CMO is that they offer stable maturities to investors.

C) The corporate bond sector is more important in the US than in Japan and Germany.

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Coupon or interest income is exempt from federal income taxes. Capital gains taxes associated with municipal bonds are not exempt from federal taxes.

manchester88

Which of the following statements concerning municipal securities is NOT correct?

A) Investors may be taxed on any capital gains on municipal securities.

B) A moral obligation bond has no legally binding requirement to be repaid.

C) All interest on municipal securities is tax-exempt at the federal level.

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Some interest on municipal bonds, such as municipal bond issues to build stadiums/arenas, is taxable at the federal level. Note though that most municipal bonds are tax-exempt – taxable munis tend to be the exception rather than the rule.

manchester88

Which of the following statements about U.S. debt securities is most accurate?

A) General obligation bonds are backed by the full faith and credit of the issuer.

B) Government agency issues are backed by the full faith and credit of the Treasury.

C) Municipal bond guarantees apply to principal but not interest payments in the event of default.

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One type of issuer of federal agency securities is government sponsored enterprises (GSE). GSE securities are not backed by the full faith and credit of the Treasury. Municipal bond guarantees may apply to both principal and interest guarantees.

manchester88

Consider three municipal bonds issued by the Greater Holmen Metropolitan Capital Improvement District, a local authority that carries an issuer rating of single-A from the major debt rating agencies. All three bonds have the same coupon rate and maturity date.

• Series W was issued to finance the rebuilding and expansion of local schools and is backed by the District’s authority to levy property tax.
• Series X was issued to build a water purification plant for the region. The District charges fees to the surrounding municipalities for their use of the plant. These fees are the only source of the interest and principal payments on the bonds.
• Series Y was issued to raise funds for the general use of the District in its ordinary maintenance projects and is backed by the District’s authority to levy property tax. These bonds carry a third party guarantee of principal and interest payments.

What is most likely the order of the market yields on these three bond issues, from highest to lowest?

A) Series Y, Series W, Series X.

B) Series X, Series W, Series Y.

C) Series X, Series Y, Series W.

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Series X is a revenue bond. Because they pay interest and principal only if revenues from the project they finance are sufficient, revenue bonds are typically riskier and therefore have higher market yields than general obligation bonds. Series Y is an insured bond. Municipal bond insurance typically results in a higher rating, and therefore a lower market yield, than an equivalent bond from the same municipal issuer. So of these three bonds, Series X should have the highest market yield and Series Y the lowest.

manchester88

The most junior type of municipal bond is the:

A) income or revenue bond.

B) indenture bond.

C) general obligation bond.

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General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Revenue bonds are serviced by the income generated from specific income-producing projects and can not be paid from other proceeds unrelated to the project.

ikoreaii

Support for the revenue bonds comes from:

A) the gross revenues of the underlying project.

B) the net revenues of the underlying project.

C) property taxes based on the project.

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Revenue bonds are serviced by the net income generated from specific income-producing projects (e.g., toll roads).

ikoreaii

Which of the following statements accurately describes direct and dealer paper?

A) Direct paper tends to incur more issue costs versus dealer paper.

B) Direct paper is the same as dealer paper.

C) The majority of direct paper issuers are financial companies.

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Dealer paper is issued via agents, whereas direct paper is issued directly by the issuer. Since it is issued directly by the company, direct paper is less expensive to issue.

ikoreaii

Which of the following attributes does NOT describe commercial paper?

A) The most common maturity is 50 days or less.

B) All commercial paper must be registered with the Securities and Exchange Commission (SEC).

C) It is typically issued as a zero coupon instrument.

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According to the Securities Act of 1933, commercial paper must be registered with the SEC. However, there are special provisions that exempt commercial paper form registration if the maturity is less than 270 days.