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Quick linksSeries 7 Municipal Bond Exam OverviewMunicipal bond topics typically comprise approximately 15 to 25 questions on the Series 7 exam, also known as the General Securities Representative Exam (GSRE), which is the test all stockbrokers must pass, to trade securities. Municipal bonds fall under the following two broad categories:
Testers who can clearly differentiate between these bonds stand a greater chance of correctly answering muni bonds questions. This article sheds light on both bond types. Key Takeaways
Revenue vs. General Obligation BondsWhen working on practice questions, a comparison chart can greatly help distinguish GO bonds from revenue bonds.
Municipal NotesMunicipal debt instruments that are not classified as bonds, due to their short maturities are called "municipal notes.” These short-term cash-flow instruments come in the following variations:
Moody's Investment Grade (MIG) rating system rates bond notes. And although actual ratings have never surfaced on the Series 7 exam, MIG itself has reportedly been referenced on certain questions. Trust Indentures and Revenue BondsTrust indentures, which are legally binding contracts between bond issuers and trustees that represent bondholder interests, are present with revenue bonds, but not with GO bonds. Trust indentures are essentially a set of terms that both parties must adhere to, that may also indicate where the bond’s income source derives from. Because municipal bonds are exempt from federal regulations, trust indentures go a long way in protecting bondholders, and are hence sometimes referred to as “protective covenants.” PTD = AV × Millage Rate where: PTD = Property taxes due AV = Estimated Market ( Sale ) × Assessment Rate ( % ) AV = Assessed value Millage Rate = $ 0 . 0 0 1 or 1 / 1 0 th of a cent \begin{aligned} &\text{PTD}=\text{AV}\times\text{Millage Rate}\\ &\textbf{where:}\\ &\text{PTD = Property taxes due}\\ &\text{AV}=\text{Estimated Market}\left(\text{Sale}\right)\times\text{Assessment Rate}\left(\%\right)\\ &\text{AV = Assessed value}\\ &\text{Millage Rate}=\$0.001\text{ or }1/10\text{th of a cent}\\ \end{aligned} PTD=AV×Millage Ratewhere:PTD = Property taxes dueAV=Estimated Market(Sale)×Assessment Rate(%)AV = Assessed valueMillage Rate=$0.001 or 1/10th of a cent Revenue Bond Covenants
GO and revenue bonds demand unique analytical approaches, due to their different funding sources. Recall that GO bonds are backed by the taxing power of the issuer. Pointedly: the money essentially comes from property taxes called “ad valorem” taxes, where the amount is based on the value of a transaction or of property. Series 7 candidates most likely will not ever be required to compute property taxes, however, they may be required to know the following basic property tax computation formula: EV * AR(%) = AV * MR (1 Mill) = TD where: EV = Estimated market (sale) value AR(%) = Assessment rate MR = Millage rate 1 Mill = $0.001 or 1/10th of a cent TD = Taxes due \begin{aligned} &\text{EV * AR(\%) = AV * MR (1 Mill) = TD}\\ &\textbf{where:}\\ &\text{EV = Estimated market (sale) value}\\ &\text{AR(\%) = Assessment rate}\\ &\text{MR = Millage rate}\\ &\text{1 Mill = \$0.001 or 1/10th of a cent}\\ &\text{TD = Taxes due}\\ \end{aligned} EV * AR(%) = AV * MR (1 Mill) = TDwhere:EV = Estimated market (sale) valueAR(%) = Assessment rateMR = Millage rate1 Mill = $0.001 or 1/10th of a centTD = Taxes due The Major Factors of Muni BondsGeneral Obligation Revenue Major Factors and Tools
Plus:
Minus:
Equals:
Economic justification:
Feasibility study:
Debt coverage ratio:
Bringing New Bonds to MarketThe processes of bringing new bonds to market widely differ, between GO bonds and revenue bonds. For revenue bonds, the principal underwriter is chosen by the issuer of the bonds, while GO bond underwriting contracts are awarded by a competitive sealed bid sale. Prior to issuing any municipal bond, issuers commission attorneys known as “bond counsels” to render legal opinions. Tax lawyers are frequently tapped for the gig because tax implications are such a looming concern to most bond investors. The legal opinion will include the following:
A copy of the legal opinion, which must accompany delivery of all municipal bonds, come in one of the following two types:
Another chief distinguishing factor between the two bond types is that GO bonds are subject to voter approval, which is not the case with revenue bonds. The following chart refers to GO bonds, which are of greater import to the Series
7 Underwriting GO Bonds
Orders for the Purchase of MunisOrders for the purchase of municipal bonds are filled in a priority sequence specified in the syndicate's priority allocation provisions, which are specified in the underwriting agreement and are provided to all syndicate members. These often popular municipal issues may be oversubscribed, meaning there are more orders for bonds than there are bonds themselves. The order period in which the syndicate solicits and accepts orders for bonds is established by the syndicate manager, and orders are filled according to the following sequence, regardless of the time sequence in which they were received.
The Series 7 exam frequently asks about this priority sequence, and so it’s worth learning the mnemonic: Pro Golfers Don't Miss (PGDM), which helps testers remember: pre-sale, group net, designated, and member orders. The syndicate buys the bonds from the issuer and sells (re-offers) the bonds to the public at a markup, known as the "underwriting spread." The typical allocation of the spread is shown in the following example of a 1-point ($10) spread: Image by Julie Bang © Investopedia 2020The total takedown earned by syndicate members for their own sales is the selling concession plus the additional takedown. In this example, the total takedown is $9 per bond. When the bonds are delivered to buyers and a settlement is made, the buyer receives a final confirmation and a copy of the official statement, if it has been completed. If the final official statement is not ready, the buyer will receive a copy of the preliminary official statement, which is subject to amendment. The official statement and the preliminary official statement are disclosure documents about a municipal offering. They serve similar purposes as the prospectus and preliminary prospectus for corporate offerings. The language differs because municipal issuers are not required to follow the Act of 1933 or other federal laws relating to the issuance of securities. If the bonds themselves are not ready for delivery, the customer will receive a temporary confirmation known as a "when issued" confirm. This document does not show the following:
The Bottom LineMunicipal bond questions sometimes make up to 20% of the 135 question items found on the Series 7 exam. Mastering these questions is key to achieving a passing score and achieving Series 7 glory. Which of the following is associated with a process whereby a municipal issuer First Appoints?--The basis price is the yield to maturity. Which of the following is associated with a process whereby a municipal issuer first appoints and then works with the underwriters who will be establishing the interest rate and offering price for a new municipal bond issue: --negotiated underwriting.
Which of the following are determining factors when making a competitive bid for municipal issues?When making a bid for an issue, municipal underwriters would consider the maturities of the bonds; current yields of similar bonds in the market; and the type of bonds being offered (e.g., are they G.O., revenue, special tax, etc.) The par value of the bonds has no bearing on the interest rates to be bid.
Which of the following information would be found in a municipal bond resolution?Which of the following information would be found in a municipal bond resolution? The best answer is A. The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions.
What would be found in a municipal bond official notice of sale?When a municipal government wants to raise capital though the sale of bonds in a competitive underwriting, the issuer will publish an official notice of sale. In the official notice of sale the issuer will describe the amount of capital to be raised and the maturity dates for the issue.
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