underwriting outline

Treasury securities

• treasury bills
• treasury notes
• treasury bonds

•  offered by auction
• competitive bidders, broker dealers, large banks, money centers-$1 million or more-bid within interest rate Fed wants
• noncompetitive bidders, buy $1000-$1,000,000, will always get bonds
• all bidders get T-bills at same yield
• T-bills, T-notes, T-bonds-winning bids get securities at one set price
• T-bill auction-Monday and Tuesday
• payment due Thursday in cash, banks- as federal funds, rollover-maturing Treasry security
• individuals roll over maturing T-bills or deposit a check before auction date
• banks, large institutions set up federal funds account with Fed and pay on Thu payment due
• notes-auction 2nd and 4th Wed, payment due on 15th or last day of mo
• no prospectus, no official statement required
• exempt from Securities Act of 1933
• negotiated underwriting
• issued at price close to par

Noncompetitive bidders for U.S. government T-bills receive which of the following yields at auction?

• the highest yield
• competitive bidders determine yield
• noncompetitive bidders get T-bills first at highest yield 

underwriting outline

underwriting spread,

• $ paid for underwriting

• negotiated underwriting
• built into price, competitive underwriting

spread for corporate issue,

• difference between public offering price and issuer proceeds

spread for a municipality

• difference between reoffering yields and syndicate bid to issuer 

spread factors

• size of issue
• size of corporation
• size of industry
• size of minicipality
• reduced by underwriter's advertising and registering/blueskying costs
• divided among syndicate members and broker/dealer that assists in selling issue

sales charge

• lead underwriter gets part
• known as manager's fee
• part of total spread
• manager gets fee on every share of bond sold-did preparation work
• concession, syndicate member decides selling group will sell bonds for them, syndicate member gives part of spread to selling group member
• syndicate members get rest of spread

corporate spread

• manager's fee, compensation for work on underwriting. 
• receive manager's fee even if they don't sell shares
• underwriting fee. sales charfe beyond manager's fee
• underwriting fee, biggest part of sales charge
• get underwriting fee not used in concession, if syndicate members allow selling group broker/dealers to sell shares
• no name, remainder of underwriting fee not used in concession
• syndicate member a)get underwriting fee b)give concession to selling group member

 In a corporate issue, a syndicate member receives which of the following upon sale as part of the underwriting?

• underwriting fee
• underwriting fee for syndicate sales
• managing fee, manager gets
• concession, for selling group sales

Municipal spread

• manager's fee, for syndicate manager, gets even if he doesn't sell the bonds
• total takedown, for syndicate members and syndicate manager
• selling group, gets concession for sales
• total takedown, concession and additional takedown 
• manager buys municipal issue at a discount
• total takedown, manager awards bonds to syndicate members excluding discount 
• total takedown= concession + additional takedown

In a municipal issue, a syndicate member receives which of the following upon sale of part of underwriting?

• takedown
• syndicate gets takedown
• selling group member receives additional takedown
• spread, total

underwriting outline

Presale orders

• underwriter takes before bid is made or negotiated offer is settled
• institutional investors buy without price or yield
• underwriters pre-sell a large amount @low interest cost for issuer
• underwriters tell large investors to buy before they submit a bid
• investors have faith in underwriters, buy without knowing interest rate or price

group net orders

• syndicate members sell to institutional buyers
• all members of syndicate get credit for part of sale
• buyers can avoid favoritism of syndicate members
• helps buyer to receive bonds if whole issue sold out

designated orders

• syndicate member enters
• one+ syndicate members get credit for sale
• large blocks get priority
• mutual funds/institutions place large orders
• politics and percentage of syndicate allocation favored
• syndicate places order for institution and their syndicate gets credit for sale

 Member orders at takedown

• syndicate member submits order after order closing period
• orders are first come first serve
• designated orders for member sponsors
• ONLY leftover bonds after presale orders, group net orders, designated orders can be bought by syndicate member's own mutual funds
• manager decides amount each syndicate member can sell-depends on which syndicates participated in last underwriting, performance of last underwriting, how lead manager values syndicates, can be based on professional relationships

Notice of sale

• issuer advertises to underwriter

Syndicate agreement

• underwriter syndicate manager writes letter to syndicate members

 Tombstone advertisement

• underwriter advertises to public

 Syndicate settlement letter

• syndicate manager tells each member amount of securities they will be paid for selling

 Which of the following is the priority of orders when an issue has been sold?

• Presale,group net, designated, member orders at takedown
• preppy guys drive mercedes
• pompous guys drive mercedes
• pretty girls drive mercedes

underwriting outline

• no SEC registration: municipal bonds DO NOT 

bond disclosure:

GO bonds disclosure

• per capita debt

revenue bond disclosure 

• expected income from facility built with bond $
• how muni will spend $
• engineering info

 Exempt

• munis from Securities Act of 1933 registration requirements 
• official statement-not required by SEC

Municipal Securities Rulemaking Board Rules (MSRB)

• publish official statement
• official statement-marketing purposes

prospectus

• for corporate offerings

 official statement

• for municipal offerings

 Priority allocation of orders

1. presale orders
2. group net orders
3. designated orders
4. member orders-@takedown

• munis can be sold before underwriter's underwriting process

underwriting outline

legal opinion

• needed before a bond can be issued

bond counsel

• makes sure bond interest is exempt from taxes
• makes sure other legal matters won't affect value of bond
• makes sure bond is a municipal bond according to area laws
• may get favorable legislation passed 
• attests to tax exempt status of bond
• IRS determines tax exempt status of bond according to passed laws 

qualified legal opinion

• some aspect may make bond interest taxable
• some legal matter may affect bond value

nonqualified legal opinion

• no aspect would make bond taxable
• no aspect would prevent bond from keeping tax-exempt status

 official statement

• municipal bond equivalent to corporate bond prospectus
• underwriter prepares this before bond is sold to public
• given to purchasers and dealers when they request it 
• preliminary official statement, before official statement is given, no pricing info

official statement

1. purpose/use of bonds
2. how funds will be used?
3. call provisions
4. other info investors want

Which of the following statements is a description of a qualified legal opinion?

•  The legal opinion on the bond's tax exempt status is less than 100% certain
• qualified, some uncertainty on tax-exempt status
• OR some uncertainty on legal matter affecting bond
• nonqualified-no uncertainties about bond's tax exempt status

underwriting outline

1. notice of sale-placed
2. underwriters use New Issue Worksheet
3. underwriter submits New Issue Worksheet with Good Faith Deposit, returned to losing bidders
4. firm commitment underwriting, underwriter buys issue from issuer and sells to investors

• financial advisers with business relationships with municipalities cannot bid on competitive issues without issuer's permission
• potential conflict of interest, Municipal Securities Rulemaking Board (MSRB) stop advisers from working as underwriters without permission
• conflict of interest, adviser working for municipality wants lowest rate for bonds, underwriters want higher rate for bonds to make bonds attractive to investors

 Scale in a municipal bond

• yield scale, new bonds are priced NOT in dollar amount
• yield scale, yield to maturity for serial bonds as they mature
• serial bonds have some principal maturity/year
• offering scale variables a)interest rate of each maturity date b)price bond is offered
• normal yield: low interest in beginning, higher interest later, most common
• inverted yield, high interest in beginning, lower interest later, least common
• flat yield, same yield in beginning as later, rare

Revenue bonds

• munis issue to fund a project/facility
• revenues will repay bond issue 
• revenues will pay for maintenance 

Which of the following describes a normal yield scale?

• early maturing bonds have lower yields
• yields increase later

inverted

• high yields at beginning
• lower yields later

Negotiated underwriting

• issuer does not need competitive bid
• may get lower price from negotiation than bid
• municipality has a relationship with an investment banker-worked with in past
• underwriter negotiates best price with issuer-thinks about what the expected market price for bond will be
• usually firm basis
• best efforts basis, can be
• best efforts, usually all or none underwriting

underwriting outline

Revenue Bond  Index

• a.k.a. the REV 30 index 
• average interest rate on 25 revenue bonds with 30 years to maturity
• help determine interest rates for new issue
• revenue bonds-not rated
• cannot determine-will revenue bond project make all interest and principal payments?

General Obligation 20 year bond index

• helps underwriters to decide how to price new issue based on similar issues in index
• index of interest rates on 20 general obligation bonds
• helps to decide interest rates for a new issue
• same as an A+ (A1) rating

40 Municipal GO bond index

• same as BBB ratings

11 GO bond index

• same as AA ratings

indexes

• published in Bond Buyer on Friday
• determined Thursday every week
• ratings: ability of issuer to make principal and interest payments reliably 

30 day visible supply

• weekly list
• underwriters will offer these municipal bonds during next 30 days
• published in Bond Buyer on Mondays

net interest cost

• amount issuer actually pays over the life of the bond
• face value x interest paid over life of bond
• bid at premium, N.I.C.=(total interest cost-premium)
• bid at discount, NIC=(discount + total interest cost)

true interest cost

• interest cost including time value of $

interest rate is influenced by

• information on tax-exempt status of bonds
• issuer's financial condition
• to get this info, underwriter meets with issuer's bond counsel 

bond counsel

• assess tax exempt status of bonds
• check existing laws about bond issuance

placement ratio

• in Bond Buyer weekly on Mondays
• number of bonds sold in a week/number of bonds offered that week
• estimate of new municipal bond issue sales
• are people buying bonds?
• are higher rates needed to sell the bonds? 

Underwriting Outline

General Obligation Bond

• municipality issue
• backing is municipality's taxing power
• competitive bid process to select underwriter
• Bond Buyer, advertisement to underwriters
• notice of sale, municipality asks underwriters to bid to work on issue
• small issue-municipality will use a local paper and local bank can underwrite issue

Notice of sale

• maturity dates of bonds
• range of acceptable interest rates
• call features
• call calculation-net interest cost method or true interest cost method?
• issuer outlines good faith deposit 

Competitive bid process

• potential issuers submit bids 
• how much $ issuer will get paid for bonds
• interest cost/year
• total interest cost issuer pays-either net interest cost or true interest cost
• new issue worksheet, bid sheet in Bond Buyer, outlines bid steps
• bids must be delivered on a certain date-often arrive right before deadline
• issuer opens bids, chooses based on lowest interest cost and highest amount $ to issuer
• issuer may expect underwriter to sell a minimum amount of bonds

The City of San Francisco has issued an advertisement stating that it is accepting bids for a $40 million general obligation bond with maturities from 2001 through 2020. The advertisement is called

• a notice of sale
• advertisement- issuer wants to to find an underwriter
• tombstone, ad by underwriting syndicate, announcement 

Determining the bid

• issuer give 2%-3% range underwriters have to keep interest
• underwriters bid on scale, interest rate + price helps decide investor yield 
• Bond Buyer has  interest rates of long term bonds 

underwriting outline

syndicate letter

• account is eastern/western?
• other terms except syndicate member commitment
• stabilizing bid, amount? when will occur?
• if all of issue is sold, how order will settle?
• names of syndicate members and % participation 
• manager-full control or no?
• manager duties
• needed info about syndicate members
• spread: manager's fee, concession, re-allowance 
• stabilization, needed when market price begins to decrease below new issue offering price 
• if all shares of new issue unsold, secondary market can develop 
• if secondary market price of issue < price of new issue, difficult for syndicate to sell
• stabilizing bid, syndicate manager may support price of issue in secondary market, offers to repurchase issue
• stabilizing bid, at same price of new issue or lower
• stabilizing bid, penalty bid, selling group loses commission on sale of issue that is repurchased by syndicate manager 
• purchase contract,agreement among underwriters, terms and conditions for underwriting-levels of participation
• priority for allocation, shows customers interest in underwriting
• syndicate manager-decides which firms get securities
• agreement, tells how much each underwriter will participate
• order of settlement, priority for orders to be filled

1. group net orders: sold at public offering price

• everyone in syndicate gets sales concession
• large order to buy new issue by one of syndicate members
• all syndicate members get concession for sale
• all members get part of concession

     2. designated orders: one of syndicate members places order to buy new issue

• not all syndicate members get credit for sale
• large blocks get priority
• designated order, order for mutual fund 
• based on politics 

      3. Greenshoe clause

• when offering oversold
• underwriter asks issuer to be able to issue more shares
• decide ahead of time how many extra shares can be issued if issue is oversold
• issuer agrees extra shares can be issued in if issue is oversold

A corporate issue that is being underwritten has been effective for over a week. The price starts to drop, so the manager enters a stabilizing bid. The public offering price on the issue is $31. At what price will the manager enter the stabilizing bid?

• $31
• the stabilizing bid at/below public offering price
• always at public offering price so issue will cost same as initial offering price 

underwriting outline

• effective date, date issue is released to be sold
• quiet period, cooling off period, time from filing of registration statement to effective date 
• 20 day cooling off period
• allows issuer to do final review of issue
• allows issuer to register with states where issue will be sold-blueskying 
• gives public time to hear news about new issue
• gives SEC time to review prospectus-is required information present?

preliminary prospectus, red herring

• price is NOT shown
• industry people NOT general public CAN receive information about issue
• quiet period, NO promotion or sales of issue 
• effective date, wait until E.D. announced, then can solicit 
• preliminary prospectus CANNOT have ads included

underwriter and syndicate members determine the price the public will buy issue @ 

• selling syndicate looks at 1)current performance of company, 2)value of company against market c)look at corporate dividends and earnings, products, other companies in industry, other factors that affect market price public is willing to pay
• selling group, NO influence on price

Which of the following can be sent with the preliminary prospectus?

• nothing
• registration isn't done
• until issue effective, advertising CANNOT happen

prospectus

• Securities Act of 1933: stock and corporate bonds must include prospectus
• comes with registration statement
• SEC reviews before release
• SEC makes sure necessary info has been included, disclosures made

tombstone advertisement

• in newspaper
• underwriters show new issue is available
• primary issue, corporation to investors
• secondary distribution, large stockholder selling to other investors 
• split offering, corporation and large corporation are selling securities at same time 

underwriting outline

• new corporate issue MUST register with SEC
• sold 1)underwriting 2)private placement
• with underwriting corporate officers can sell some of their shares-underwriting is both primary and secondary underwriting
• primary part, new shares from company
• secondary underwriting, stock from selling stock holders
• bonds, preferred stock, common stock
• lead underwriter, sells securities
• selling syndicate, help sell securities
• corporations negotiate with underwriter to reduce cost of selling issues

issuer

• provide information for prospectus
• supply issue certificates
• 
  

underwriters

• a)register issue
•  b)sell issue
•  c)inform public about issue
• d) form selling syndicate, at time of negotiation with issuer underwriters 
• e)write prospectus-satisfy SEC disclosure requirement, provide info for selling broker/dealers to give to clients
• blueskying, register issue with states where it will be sold 

Important underwriter decisions:

• a)register issue with SEC
  b)make sure issue satisfies state requirements
• b)determine broker dealers to include in syndicate

The syndicate manager is responsible for

• blueskying the issue
• sending the registration statement to the SEC
• putting the prospectus together
• determining  allocations for syndicate members
• stabilizing issue
• allocating securities for syndicate
• issuer gives firm necessary info and syndicate manager finishes registration 
• managers direct underwriting process
• stabilizing issue happens at initial offering, maintaining public offering price

effective date

• date the issue is released to be sold 

underwriting outline

Eastern account

• undivided account
• E and U are both vowels
• underwriters sell as much as they want
• underwriters are paid for what each sells
• excess profits are based on % participation
• undivided liability: any unsold part of issue, syndicate members are liable for %  share of unsold issue
• if firm sells all agreed to stock, may have to buy stock that other syndicate members did not sell

A syndicate member in an undivided $12 million municipal offering agreed to sell $1.2 million of the offering. Initially the firm only sold $900,000 of the bonds. After four weeks 1.5 million of the offering remains to be sold. The syndicate manager decides to close and settle the account. The syndicate member firm has liability for what amount of the bonds?

• $150,000
• 10% member
• 10% of 1.5 million unsold
• firm has responsibility to sell $150,000 of unsold issues

Western account

• divided selling responsibility

A syndicate member in a divided $6 million municipal offering agrees to sell $600,000 of the offering. Initially the firm only sold $400,000 of the bonds. After one week $1 million of the offering remains to be sold. The syndicate manager calls all of the members to tell them to sell and reminds them of their commitment. The syndicate member has responsibility for what amount of bonds? 

• 1 million
• selling responsibility is  ALWAYS 100%
• liability would have been $200,000 because agreed to 600k and only sold 400k 

underwriting outline

underwriting syndicate

• different investment banks compete to be underwriter
• competitive or negotiated method
• syndicate, underwriting group
• selling syndicate, underwriting group
• lead underwriter, manages underwriter
• syndicate manager, lead underwriter-manages books, deals with issuer and syndicate

tombstone ad,

• advertise securities
• can only provide basic information
• list of underwriting firms names
• lists lead underwriter next to other broker/dealer firms

selling syndicate

• one or more broker/dealers who will commit large sums to bringing issue to market
• help with pricing of issue
• decide how to price issue
• syndicate buys shares/bonds from issuer
• lead underwriter, responsible for selling big part of issue
• other syndicate members responsible for selling small part of issue

syndicate letter a.k.a agreement among underwriters a.k.a. account letter a.k.a syndicate agreement

• terms of account management
• amount of issue per member
• amount of money paid per member
• basis-how issue will be sold if oversold?
• syndicate member obligations
• participation-east or western account?
• corporate-sold night before or morning of sale, last opportunity for syndicate members to give up their commitment
• municipal-signed 2 weeks before bond issue
• after issue sold, members receive sales charges
• syndicate settlement letter, issue has been sold, how much syndicate members receive for selling their parts of the issue

Selling group

• no financial commitment to sell # of shares
• can sell parts of issue
• gets the most small profit of all vs manager, underwriter

Which of the following is part of an underwriting syndicate that has a financial responsibility to the underwriting but has no other commitments other than pricing and selling?

• syndicate member
• financial commit and sells
• manager, underwriter-other work
• selling group sells, no financial commitment 

underwriting outline

• underwriting a.k.a. investment banking 
• help firms, corporations, municipalities raise $ 
• corporations use $ for growth and investment
• municipality use $ to build facilities, improve services

short term underwriting

• under 270 days
• bring to market
• bring to money market 

long term debt

• requires underwriting
• syndicate. help sell issue to investors

firm commitment underwriting

• underwriter promises to sell whole issue

standby underwriting

• underwriter is hired to sell leftover shares after rights offering
• rights offering, corporation that issues new shares offers those new shares to existing shareholders

when issued

• transacted on a conditional basis
• sold but certificates have not been issued
• issued stock can trade in secondary market
• underwriter sets settlement date 
• marked to market, price is recalculated every day the market price of the bonds change

best efforts underwriting

• issuer contacts one or more underwriters to sell an issue
• broker/dealers do NOT have to buy any shares they don't sell
• underwriter agrees to do best to sell issue
• for a corporation with poor credit rating to issue more securities
• when a brand new issue is not selling well
• mutual funds sold this way-brokers/dealers don't buy mutual fund shares for there own account, sell what they can
• many broker/dealers are involved

all or none

• syndicate must sell all issue or entire amount of securities not sold
• when issuer needs all $
• issue not sold, syndicate refunds $ to investors, charges issuer a fee

minimum-maximum

• issuer sets minimum amount of securities that MUST be sold
• issuer sets maximum amount of securities that MUST be sold
• when an issuer needs a minimum $ but would like more
• if minimum unsold, investors refunded
• common in limited partnerships raising $

managing underwriter a.k.a. lead underwriter

• researches issuer to understand financial health
• researches liquidation value, liquidity of issuer
• researches ability of securities to perform for investors
• managers receive fee for these responsibilities 

market out clause

• agreement between issuer and underwriter-allows underwriter to withhold issue from market if it isn't likely to be sold
• conditions where underwriter is not responsible for bringing issue to market such as bankruptcy, complete stock market crash-issuer doesn't have to pay underwriter
• if issuer doesn't provide full picture of financials, underwriter may be able to receive compensation-recover underwriting costs

corporate underwriting

• issue stocks and bonds for companies who want to raise $ to use in business

municipal underwriting

• issue bonds for municipalities as general obligation bonds and revenue bonds
• general obligation bonds-backed by taxing power of municipality
• revenue bonds-backed by revenues of the facility

All of the following are types of municipal underwriting commitments except:

• standby
• corporate only

municipal taxation outline

• municipals-exempt from federal taxes
• exempt from state taxation if owner is from state
• IRS determines tax exempt status on municipal bonds through tax code
• bond counsel assesses tax exempt status of interest on bond
• yield=(municipal bond yield)/(100%-tax bracket)
• use yield NOT coupon to calculate municipal bond yield 
• buy at discount, appreciation taxed as ordinary income at maturity
• buy at premium, held to maturity, no loss
• Original issue discount (OID) and zero coupon bond-no set interest rate: appreciation=interest=tax free
• buy at premium, amortize premium over life of bond

Bond swaps

• to produce a loss to offset gain for year
• to produce gain to offset loss for year
• to increase or change quality of portfolio
• to increase income for portfolio 

An investor is shown an 11.5% corporate bond that is being offered on a 10.8% yield. What is the equivalent yield of a municipal bond if the investor is in the 28% tax bracket?

• 7.75% yield
• 10.8 x 72% = 7.77 round to 7.78%

Who won't buy municipal bonds

• nonprofits
• corporate pension plans

Who will buy municipal bonds

• banks
• insurance companies
• individuals

All of the following are purchasers of municipal bonds except?

• corporate pension plans
• do not pay taxes
• do not need low, tax free interest from muni bonds
• government bonds offer higher returns with less risk 

Writer of rules

• Municipal Securities Rulemaking Board (MSRB) 
• apply to broker/dealer firms
• apply to underwriters
• apply to registered representatives
• apply to promoters of municipal bonds
• issuers exempt

Enforcement of rules

• FINRA: Financial Industry Regulatory Authority-for all firms who sell securities, imposes violations for violations of rules by securities firms
• Comptroller of the Currency, for banks
• Federal Reserve Board "The Fed", for banks
• Federal Deposit Insurance Corporation (FDIC)

SEC, 

• enforces violations for non-FINRA members
•  imposes penalties of Securities Acts
• legal action against broker/dealer, registered representatives, or individual who commits acts of fraud or violates Securities Act while selling munis

Required for new accounts

• customer name and address
• of legal age?
• Social Security #
• occupation
• name/address of employer
• if customer works for another broker/dealer?
• financial status
• tax status
• investment objectives
• beneficial owners name and address  
• authorization to transmit account info for official communications on account (Rule G-15)
• signature of registered rep
• signature of municipal securities principal or branch office manager of the branch

When accounts are opened for employees of other firms

• written notice MUST be sent to employer
• copies of confirmations of securities transactions must be sent to the employer
• any other instructions from the employer must be followed
• each order does NOT need to be authorized by the employer
• recommendations must be suitable
• discretionary account-customer gives broker/dealer the right to buy and sell without consulting with customer before entering the order
• all quotes must be fair and equitable, does NOT have to be best price

Municipal bond delivery

• new issue settlement date set by syndicate manager, usually set at time bonds are offered
• 3 day regular way
• same day, cash trades happen that day
• bond not in default-gets accrued interest up to but not including settlement date
• bond in default, trades flat with NO accrued interest
• MUST be in good deliverable form
• registered bond must have owner sign bond
• NOT mutilated
• if bearer bond, coupons MUST be attached
• MUST have legal opinion attached or be sold ex-legal
• coupon, bond #, maturity date must be readable 
• CUSIP #(tracking#) does NOT have to be readable
• certificate of authentication, from trustee if above items aren't readable

municipal bond confirmations to dealer

• sent to contra dealer, dealer on other side of the trade
• identification & description of trade
• description of bond
• par value of bond
• if bonds callable-can be redeemed before maturity
• if new issue, selling concession
• if book entry only

municipal bond confirmations to customer

• description of security
• trade date
• settlement date
• dollar amount of transaction
• accrued interest
• lower of YTM-at discount or YTC-at premium
• whether firm acted as agent of principal for transaction
• name of previous owner or offer to provide name upon request

stripped bond

• exempt-maturity date
• exempt-par value
• needed-final payment date
• needed maturity value 

What is regular way delivery for a municipal bond purchased in the secondary market?

• three days
• regular way delivery for a municipal bond bought in the secondary market 

Municipal principal

• supervises activities of registered representatives
• supervise email and correspondence of RR to customer 
• opening of municipal accounts before munis are bought/sold
• any muni order before or on day order is entered
• official statement CAN be sent without principal's signature

MSRB representatives

• take test within 90 days of being hired, must pass within first 9mo or be fired
• 90 day apprenticeship before they can sell securities
• Series 52 pass-can sell municipal and government securities
• Series 7-sell everything except commodities 
• NO customer trades till test passed and apprenticeship
• RRs can act as financial advisors and traders 
• RRs can underwrite
• RRs cannot supervise other RRs
• principals supervise RRs
• NO customer gifts>$100
• if fee charged, firm's financial interest in security must be disclosed 
• if firm underwrote bond, must disclose if firm was part of underwriting syndicate

Correspondence and advertising

• communication<25 customers to buy or sell municipal securities
• reprint of existing article
• info from research department
• info RR wrote

sales literature

• notices
• circulars
• municipal securities reports
• telemarketing scripts
• article reprints
• abstracts/summaries of official statement

Sales literature DOES NOT include

• official statement
• preliminary official statements
• listings of dealer offerings

Advertising by municipal joint account

• MUST include names of all members on account
• account agrees to price-buy or sell securities
• refer ONLY to agreed price
• ONLY show agreed price
• when syndicate gets bonds, customer gets settlement within 60 days 
• joint account a.k.a selling syndicate
• banks, mutual funds sometimes want to buy/sell a large block of municipal bonds
• broker/dealer is hired to buy /sell for institutions and municipal joint account-other firms help fill order
• if institutional investor sells bonds, municipal joint account sell bonds to their own investors MUST be at same price
• if institutional investor wants to purchase bonds, muni joint account members may solicit their customers, MUST do trade at same price and same time give names of other members of joint account

control relationship

• must tell customers  of control relationship before buy,sell,exchange
• firm must send written disclosure before order
• if disclosure is not provided before order, must be provided when transaction occurs
• firm can't do transaction in a discretionary account with control relationship exists unless customer wants trade 

arbitration

• customer can initiate arbitration against a broker/dealer in a dispute
• broker dealer CANNOT initiate arbitration against customer unless a customer agrees to it

mediation

• rarely used
• nothing binding

litigation

• least used
• most costly

Who must approve all correspondence regarding municipal bonds when sent by a registered representative to a customer?

• Municipal securities principal

Municipal outline

bearer bond

• redeem when it matures 
• redeem when it is called
• holder may have to worry about missed interest payments
• if holders fail to collect principal or fail to see redemption notice they do not lose anything except an interest payment on the bond

registered bonds

• holder can redeem by sending bond certificate to issuer
• issuer sends holder a check for principal + accrued interest
• holder may have to worry about missed interest payments
• if holders fail to collect principal or fail to see redemption notice they do not lose anything except an interest payment on the bond

book entry bonds

• trustees send principal amount and last interest payment to name on books
• book-entry: no worry about missed interest payments

notice of redemption

• issuers must give notice 30 days before they call bonds and publish intent in national financial publication like Wall Street Journal 

how bonds are called

term bonds

• called on a random selection basis

serial bonds

• called in inverse chronological order of maturity
• random basis, if only a portion of a year's issue is called

Bond Buyer

• if a bond called, it will be listed in Bond Buyer
• broker/dealers have obligation to tell clients about call

A municipality has issued a serial bond. The city has just had an influx of money and would like to call the bonds. By what method would the city call the bonds?

• inverse chronological order
• serial bonds-taken oldest first-highest interest rates
• term bonds-random method

Overlapping debt

• general obligation bond-shared debt by two taxing areas, benefits both areas

Net direct debt

• net direct debt=(old debt + newly proposed debt)/(city population)
• net debt=(old debt+overlapping debt+newly proposed debt)/(city population)

coterminus debt service

• when 2 or more municipal areas have same boundaries
• all debt is overlapping

Analyzing revenue bonds 

1. in bond indenture, look at flow of funds-how $ spent, is issuer good for it, revenues pledge-how interest will be paid 
2. covenants-rate, insurance-insurance for project, maintenance
3. feasibility studies, competitive analysis, engineering studies, capital improvements, can issuer raise rates freely without muni or government interference, study- is customer base diversified?, comparison of rates in similar projects locally, tax base and population-growing?,shrinking?

Which of the following is the method of finding the net debt of a municipality?

• (Municipal debt + overlapping debt)/ (city population)
• net debt includes overlapping debt

debt service

• $ of principal and interest/year
• term bond-same until maturity date-same interest cost + principal
• serial bond-principal + interest, can change 
• level debt service-principal + interest, same through life of bond

debt service coverage

• (gross revenues pledge)=(total revenues)/(debt service)
• net revenues pledge=(total revenues-maintenance/debt service)

Municipal bond insurance

• in case muni defaults on interest and principal payments
• MBIA-Municipal Bond Insurance Association
• AMBAC-American Municipal Bond Assurance Corporation
• FGIC-Federal Guarantee Insurance Corporation

A municipality has insurance on its outstanding $40 million general obligation. By purchasing insurance, the issuer: 

• Providing a means to have principal and interest paid in event of default by municipality.

municipal securities out

Normal yield curve

• lower interest rates-beginning
• higher interest rates-later

Inverted yield curve

• higher interest rates-beginning
• lower interest rates-later

flat yield curve

• = maturities or little increase of .2% (20 basis points)

• Always choose long with longest maturity, changes the most in price

par

• nominal yield=current yield=yield to maturity

price change

• current yield,  YTM,YTC-move in opposite direction-inverse
• current yield moves least
• YTC moves most 
• order of yields N,C,B,M,C-nominal, current,basis,YTM,YTC

Inverse relationship of bond prices and yields

• interest rates increase, bond prices decrease
• muni bonds quoted in basis points
• 7% muni serial bond might be priced at 7.20% basis, selling at YTM
• par value: YTM=current yield=nominal yield

flat, 

• trade-bonds trade-no accrued interest-with general obligation and corporate bonds-near bankruptcy? 
• bank interest must be paid to holder
• bearer bonds require past, present and future interest rate coupons be attached for good delivery

When interest rates are rising, which of the following occurs with bond prices and bond yields?

1. bond prices fall, bond yields increase
2. price and yields in opposite direction
3. price and yield-inverse relationships
4. interest rates rise, less demand for bond, bond decreases in price, bond yield increases

Accrued interest

• buyer pay seller accrued interest
• seller gets interest generated for holding bond
• next interest date, buyer gets interest, part was paid to previous owner
• muni bonds-30 day month and 360 day year
• settlement date-last interest payment date=number of months and days

Calling municipal bonds

• in whole call-callable in first 5 years at a premium, deceases to par after 3-5 years-initiated when refunding/advanced refunding has occurred
• partial call, callable in first years at premium, decreases to par after 3-5 years, initiated when issuer has extra money due to more revenues than expected
• defeased call, usually callable in first years at a premium that decreases to par after 3-5 years-initiated when advance refunding has occurred, issuer prefers to keep $ in U.S. government bonds that are paying the issuer more interest more interest than municipality is paying out to holders
• sinking fund call, usually callable in first years at premium that reduces to par after 3-5 years-initiated in term bonds when the issuer has extra money-more revenues than expected or in serial bonds that have a long term maturity as well
• extraordinary call-callable at par-initiated when their is leftover money from the bond issue and the project is completed
• catastrophe call, callable at par, initiated when the project blows up/collapses/destroyed

refunding/advance refunding

• when bonds are issued at high interest rates, issuers will call bonds when interest rates decrease
• call feature, how bonds will be called before maturity date
• call price, at a premium in early call years, decreases to par after 3-5 years 
• refunding, issuer calls bond before maturity and issues new bond-use proceeds to pay off amount of outstanding bond it wants to refund
• outstanding bond must be callable
• premium paid by issuer for right to call bonds early
• in whole call, calling of the bonds
• refunding and pre-refunding-allow issuers to call in bonds-issuer paying high interest rates, reissue with lower interest rates
• refunding can increase credit rating of bond, increase marketability
• advanced refunding, early issuing of new bond to pay off old bond
• prerefunding, muni issues new bonds for purpose of refunding outstanding bonds, outstanding bonds are not callable when new bonds are issued, proceeds are put into government bonds, maturities coincide with callable date of existing bond, securities kept in escrow account, interest from government bonds has to be high enough to cover debt service of new bonds

partial called bonds

• outstanding bond can be called 
• issuer doesn't have to refund if enough $ is available, tax revenues or facility revenues
• reduce interest costs, call in long term maturity bonds
• market price goes to call price, limits price of bond

defeased bonds

• issuer prerefunds outstanding bond with less interest
• issuer invests proceeds from new issue in U.S. government bonds
• U.S. government bonds pay higher interest>municipal bonds
• interest on new municipal bond is paid by income generated from government bond
• issuer may not call bond
• keeps bond paying U.S. government interest
• use taxes or revenues to pay for new bond interest & principal
• old bond-guaranteed by U.S. government, AAA rating
• defeasing, interest received from government bond pays new bond interest
• old bond not called, just pays interest and principal
• eventually call old bond, pay off with proceeds U.S. government interest
• defeased call, called at a premium in early call years, decrease to par in 3-5 years

Sinking fund call

• sinking fund, place where $ is put away to pay for principal when due
• required on term bonds
• optional on serial bonds
• sinking fund $ invested in U.S. government bonds
• partial call, issuers may call part of outstanding bond that is callable if $ in sinking fund
• bonds called at premium in early call years, decrease to par in 3-5 years

Extraordinary called bonds

• part of bond issue not needed to complete project bond was intended to complete
• issuer can do at any time, decreases debt service costs, strengthens rest of issue
• at par ALWAYS

catastrophe called bonds

• used to build a bridge, stadium
• if natural disaster makes project unusable, issuer receives insurance and calls in remaining parts of issue
• project doesn't make $ anymore
• ex. bridge in Minneapolis
• ALWAYs at par

Call protection

• when bond called, investors at disadvantage-forego high interest rate by bond 
• issuer may not be able to call bonds for a period of time
• bond can only be called at premium, helps cover some of investor's loss of interest

A muni has pre-refunded its $30 million outstanding bond. The old bonds will not be called for 3 1/2 years. What can the municipality do with the proceeds from the refunding issue?

• invest in government bonds. 
• muni can only invest in government bonds
• in escrow account
• income from government bonds must cover debt service of new bonds 

municipal bond outline

Nominal yield

• a.k.a. coupon
• a.k.a. rate
• fixed amount of interest paid yearly
• sometimes> 6mo from dated date to first interest payment date 
• interest payments 6mo apart 

Current yield

• income: current market price
• yearly interest (nominal yield)/current market price

Yield to maturity

• YTM, current yield > nominal yield (discount bonds)
• YTM, current yield<nominal yield (premium bonds)

When a bond is selling at a premium which of the following would be the highest relative to the others?

• nominal yield, always highest in a premium bond
• YTM, basis, current yield< nominal yield 

Discount bond

• lowest, nominal yield

Municipal bond outline

Basis points

• how municipal bonds are quoted
• each=1/100 of 1% of .0001
• 7.85 basis=7.85% yield to maturity

Bonds at par, premium, discount

• face value, selling at 100, basis=nominal yield
• above face value, sell at premium, above 100, basis<nominal yield. Quoted at yield to call
• below face value, sold at discount, below 100, basis>nominal yield. Quoted at yield to maturity 

firm quote

• dealer is ready to sell at set price
• dealer can place time restriction on quote
• dealers can recall bid during hour
• when dealers call traders, traders must be ready to buy or sell immediately
• forcing bid to get investors to make up minds

subject quote

• info only 
• for general obligation or revenue bond
• gives investor idea of price range of bond

Your firm's trading department is called by another broker/dealer that is interested in purchasing bonds from your firm. The trading department gives a quote of 7.80%, good for an hour with a 5 minute recall. Which of the following is true is true about this quote?

• the other firm has control of the bonds for one hour
• during the hour your firm can call the other firm back with a five minute "fill or kill". 
• During the hour, your firm can show the bonds 
• Your firm can't sell bonds until you give other firm 5 minute call

municipal securities outline

Bond Buyer

• online
• for underwriters only
• Bond Buyer Revenue index, 25 bonds

General obligation indexes

• GO 11 index, AA rating
• GO 20 index, A+ (A1)
• GO 40 index, BBB

Munifact wire

• info on new issues in primary & secondary markets
• info a)issuer b)indenture, c)information for analyzing ratings, d) no prices/yields

Kenny wire, C-wire

• services for secondary trading

GO 40 index is composed of which of the following:

• General obligation bonds of 20-years to maturity.
• all GO indexes are 20 year bonds
• Revenue Index has 25 bonds,  30 year bonds
• GO index has 11 bonds, 20 bonds and 40 bonds

Interdealer trading

• trading between bond traders

Broker's broker

• NEVER act as a market maker
• help dealers find a wanted bond
• help institutions buy and sell bonds
• help large buyers stay anonymous
• act as a broker
• NEVER as a principal

individual investors

• household investors 
• higher tax brackets
• want yield exempt from taxes

institutional investors

• buy large amounts of bonds at one time
• commercial banks
• insurance companies
• bond mutual fund
• buy large quantities
• can buy whole issue 

A broker's broker is used to doing which of the following?

• find bonds for another broker/dealer and act as an agent in buying them. 
• go between, help other broker's find and buy bonds

municipal securities outline

	Moody's	S&P
Highest	Aaa	AAA
High	Aa	AAA
Upper Medium	A1,A	A
Lower Medium	Baa	BBB
Marginally Speculative	Ba	BB
Very Speculative	B,Caa	B
Default	Ca,C	D

 

Feasibility studies and engineering reports

·        Needed for revenue bonds

Legal opinion

·        Bond counsel: lawyer knowledgeable in municipal bond laws

·        Exempt from federal and state taxes

·        Research local and state taxes to check-is bond tax exempt

·        May help in getting favorable legislation passed

·        Supply info to underwriters for official statement

Bond rating organizations

·        Consumers have credit scores-show how credit worthy

·        Bond ratings-show chance of default of interest and principal

·        Big three: Standard and Poor (S&P), Moody’s, Fitch Investors Service

·        Rate general obligation bonds and revenue bonds backed by property taxes

·        Refunded, pre-refunded or advance refunded, ratings go up to AAA and Aaa

·        Moody’s and S&P only rate large offerings

·        Small offerings aren’t rated, high cost to get rating

·        Most revenue bonds aren’t rated

·        Revenue bonds backed by property taxes are rated

Bond rating criteria at time of rating

·        Amount of bonds issuer has outstanding

·        Amount of overlapping debt, if any?

·        Amount of debt/taxpayer (per capita debt)

·        Amount of population-growth and character

·        how will $ income be made to make payment

·        amount of property and assessed value

·        how well municipality has collected taxes in past

Bank qualified bonds

·        municipal bond purchased by a bank

·        bank can deduct 80% of the carrying costs paid to

·        carrying costs, interest expense to buy municipal bonds, special benefit

·        banks can deduct carrying costs-allowed-only bank qualified bonds

Which of the following is an S&P rating?

·        AA. S&P ratings are in capital letters. Moody’s ratings are in lower case letters

Municipal Securities Rulemaking Board

·        Regulated underwriters, broker/dealers (B/Ds), and sellers of municipal bonds

·        Exempt: osiers

·        Voters get to decide-new municipal issues

·        Two markets: one for new issues, next is  secondary market

 Primary market

·        Notice of sale, municipal ad to underwriters, want bids on cost of underwriting a new issue

·        Notice of sale, competitive underwriting only

·        Tombstone advertisement-underwriters ad to buyers

Tombstone ad

·        Offering price

·        Name of issuer

·        Dated date-date interest starts to accrue

·        Dates on which interest payments are made

·        Offering scale, shows yield to maturity

·        How to get an official statement

·        Name of underwriter

·        Names of selling syndicate and (sometimes selling group) members

·        Cannot: offer an incentive for new issue, info only, names appear by % participation

Competitive underwriting

·        Issuer ad to underwriters to submit bid on cost of underwriting a new issue

·        Issuer chooses underwriter who allows issuer to get highest proceeds with lowest interest cost

·        Broker/dealer firm who want to compete submit bids after seeing notice of sale ad

Negotiated underwriting

·        Issuer asks broker/dealer (B/D) to give a cost estimate of underwriting a new issue

·        If estimate too high, issuer argues for lower cost

·        If lower cost isn’t given, issuer contacts another underwriter

Official statement

·        All muni bonds come with an O.S.

·        Tells important parts of bond-issuer, protections for buyer, call features

Which of the following is not a method or component of a municipal underwriting?

·        Standby-corporate underwriting.

·        Competitive, negotiated-municipal underwriting

·        Bid-part of competitive underwriting

Secondary market

·        Market for investors to trade with other investors

·        Secondary issue, any issue sold for 2^nd time or more

·        Primary issue, issuer sells to buyer, 1^st time

·        Bond traders: broker/dealers (B/Ds) who buy bonds from investors-want to sell and resell to investors wanting to buy

·        Secondary market trading: interdealer trading, retail business between individuals, institutional investor business

municipal securities outline

Flow of funds

·        Where funds facility receives will be spent

Revenue fund

·        First, issuer must deposit received revenues here

Net revenues pledge

·        Revenue fund $ must pay project expenses

·        Remaining $ to pay debt service on bond

Gross revenues pledge

·        Revenue fund $ to pay principal and interest on bond

·        Remaining $ to pay maintenance costs

Operation and maintenance fund

·        $ to pay for operation and maintenance on facility

Sinking fund

·        For term bonds

·        $ issuer puts away, will redeem bonds with it later

·        Makes sure issuer has enough $ at bond’s maturity

·        Escrow account, part of issuer’s income from taxes or revenues is placed here, can only be used to pay principal back

·        $ must be deposited  yearly, $ invested in government bonds for security

·        $ in sinking fund: municipality will buy its own bonds at a discount or pay off bonds when called

·        Sinking fund call, if part of bond issue is called and paid by sinking fund

·        Term bonds have a sinking fund-why? The whole bond comes due at once and provides $ for issuer then

·        Serial bonds don’t have a sinking fund-why? Part of the issue comes due each year. Sinking fund could be useful with a serial bond to provide for future calls and for the part of the issue that comes due yearly

Debt service fund

·        Contains additional $ to be spent on bond’s principal and interest payment (debt service) if revenues aren’t enough to make payments

·        Debt service reserve fund: reserve to pay debt service in future years

·        Reserve maintenance fund: reserve to pay for unexpected maintenance costs

·        Renewal and replacement fund: reserve to replace worn out equipment and make repairs

·        Surplus fund: can be used for anything legal-the redemption of bonds or to decrease user fee payments

Which of the following provides for the debt service and maintenance of a municipal revenue bond?

·        Rate covenant

·        keeps rates high enough to pay operation and maintenance costs

·        promises such as keeping records, keeping insurance, maintaining facility