SIE 8

Municipal bonds

These are bonds issued by local, state, and territory govs. They are tax free on the federal level.

General Obligation Bonds

A type of municipal bond. These bonds are paid off by local taxpayers. Issuing of GO’s requires voter approval.

• They fund nonrevenue-producing facilities.

• They are backed by the full faith and credit of the municipality.

Because these bonds are safer, they usually have higher ratings and lower yields.

Revenue bonds

A type of municipal bond. These bonds are paid off by the revenue-producing facilities they will create.

They do not require voter approval.

They require a feasibility study for whether the project the bonds are funding will earn enough for the municipality.

They include covenants that promise the bondholders specific things to boost its credibility.

Rate covenant

Promises to bondholders that the municipality will charge sufficient fees for use of the revenue-producing facility to pay back expenses and debt service.

Debt service

Principal + interest on bonds

Maintenance covenant

Promises bondholders that the municipality will adequately maintain revenue-producing facility.

Insurance covenant

Promises bondholders the municipality will adequately insure the facility.

Negotiated offering

Where underwriter(s) are chosen directly by the issuer of securities.

Municipalities that issue revenue bonds typically choose their underwriters directly.

Issuers are not obligated to get the best price or coupon rate for their bond issue, as revenue bonds are not backed by taxing power.

What is the allocation of orders, according to the MSRB?

1. Presale orders: orders entered before the date when the securities were officially available for sale

2. syndicate (group-net) orders: The syndicate member receiving the order credits the sale to all syndicate members, and all members profit

3. designated orders: the buyer specifies which syndicate member is to profit from the sale

4. member orders: if any securities are left, syndicate members can purchase them for their own portfolios

Date of sale of a municipal securities issue

The date when the bids are submitted to the issuer for competitive offerings.

For negotiated offerings, this is the date when the syndicate signs the final contract.

In both cases, the syndicate manager sends a commitment wire to the other syndicate members on the date of sale.

Underwriting period of a municipal securities issue

the period begins when the first order is submitted to the syndicate or when the securities are purchased from the issuer.

It ends when the issuer delivers securities to the syndicate or the syndicate sells all the securities purchased from the issuer.

Special tax bonds

These bonds are secured by one or more taxes other than ad valorem (property) taxes. They may be backed by sales taxes, or license taxes, etc.

Double-barrelled bonds

These bonds are funded by revenue as well as taxes. They are used to fund revenue-generating facilities.

Limited-tax general obligation bonds

These bonds do not require voter’s approval and is backed by all revenue the municipality isn’t putting toward other bonds.

If it is backed by an unlimited tax pledge, the municipality can raise property tax rates to make sure the bonds are paid off.

Public housing authority bonds

These bonds are issued to help build/improve low-income housing.

They are backed by US government subsidies, in the case that an issuer can’t pay off the debt, the US government makes up for it.

They are thus considered among the safest municipal bonds.

Moral obligation bonds

These bonds require legislative approval to be issued.

The state has a moral reponsibility, but not a legal obligation to help a municipality pay off the debt if they cannot.

They are considered safer than many municipal bonds.

Build America Bonds

These bonds were discontinued in 2010, but many are still in the market. They help municipalities raise money for infrastructure projects.

Tax Credit BABs

Investors in these bonds receive tax credits equal to 35% of the coupon rate.

Direct Payment BABs

The municipality that issues these bonds receives reimbursements equal to 35% of the coupon rate, which gives investors a higher coupon rate than Tax Credit BABs.

TANs

Tax Anticipation Notes

These notes provide financing for current operations in anticipation of future tax revenue.

RANs

Revenue Anticipation Notes

These notes are issued in anticipation of future revenue.

TRANs

Tax and revenue anticipation notes

combination of tans and rans.

GANs

Grant anticipation notes

funding will come from a grant that the municipality is waiting for.

BANs

Bond anticipation notes

Funding will come from long-term bonds that are still to be issued.

CLNs

Construction loan notes

interim financing for construction of housing projects, while waiting for funding from long-term bonds that are to be issued. Basically a BAN but with construction specifically.

Tax-exempt commercial paper

Commercial paper, typically issued by organizations such as universities with permission of the government

Variable-rate demand note

Note with a variable rate that adjusts with interest rate

It also has a put option, allowing the holder to periodically return the note to the issuer at the stated value.

Section 529 Savings Plans

(Qualified tuition plans)

These are specialized educational savings accounts. Money can be used towards higher education, elementary or secondary public, religious, or private school.

Withdrawals are tax free.

Investors must receive an official statement or offering circular before opening an account.

Are there income limits put on a Section 529 Savings plan?

No

What happens when the beneficiary of a Section 529 Savings plan turns 18?

Nothing, the education savings plan remains in control o the owner.

ABLE accounts

Achieving a Better Life Experience

Accounts are opened to help fund people with disabilities who require money to accomodate for their disability.

To be eligible, the onset of disability must have been discoered before the person reached age 26.

LGIPs

Local Government Investment Pools

Established by states to provide other government entities a short-term investment vehicle. They are exempt from SEC registration and require no prospectus.

LGIPs do have disclosure documents that must be sent to investors.

taxable equivalent yield

This gives the interest rate of a municipal bond if it weren’t federally tax-free (a higher amount).

TEY = municipal yield / (100% - investor’s tax bracket)

What are the American territories

Puerto Rico, Guam, Washington DC, American Samoa, US Virgin Islands

Municipal security confirmations

Municipal securities settle T+2.

• broker-dealer’s nam, address, and phone #

• capacity of trade

• dollar amount of commission, if broker

• customer’s name

• any bond particulars

• trade date, time of execution, settlement date

• CUSIP ID number

• bond yield and dollar price

• accrued interest

• registration form

• whether the bonds have been called or pre-refunded

How do broker-dealers report transactions to the MSRB?

Through the Real-Time Reporting System (RTRS)

For how many years do brokerage firms need to keep advertising on municipal securities?

A minimum of three years, and they must be easily accessible for at least two years.

What is considered advertising?

Any material designed for use in the public media, such as offering circulars, market and form letters, summaries of official statements.

Preliminary and final official statements aren’t considered to be advertising as they are prepared by the issuer.

Any advertising requires a principal’s approval before public use.

indenture

(bond resolution)

The document that provides investors contract terms, including the coupon rate, time until maturity, any collateral. It comes printed on the face of municipal bond certificates, and makes the bonds more marketable. Included is a flow of funds.

flow of funds

how the money collected from the revenue-producing project will be distributed, for a bond

is a bond indenture required on municipal securities?

no, they are not required. Any state, local, and federal bonds are not covered by the Trust Indenture Act, and therefore do not require an indenture.

legal opinion (municipal bonds)

this is printed on the face of municipal bond certificates, and is prepared and signed by a municipal bond attorney.

Its purpose is to verify that the issue is legally binding and conforms to tax laws.

It may state that interest received from the bonds is tax-exempt.

What does ex-legal mean if found on a municipal bond certificate?

The bond has no legal opinion

Municipal bond official statement

An official statement is the equivalent of a prospectus. It comes in a preliminary and a final version.

It states what the bonds will be used for, information about the municipality, and details on how the funds will be repaid. It also includes:

• the offering terms

• underwriting spread

• description of the bonds and issuer

• the offering price

• the coupon rate

• feasibility statement

• legal opinion

What does the preliminary official statement not include?

The coupon rate and offering price of the bonds

When must a dealer deliver the final official statement to a customer?

By the settlement of the transaction

When must a dealer deliver the final official statement to a customer, if the customer is another dealer?

Within one business day (of what? i have no clue. book doesn’t say)

How often must broker-dealers and municipal securities dealers send written statements to customers, saying they are registered with the SEC/MSRB?

Every year

Are official statements and offering circulars considered to be advertisements?

no

What type of municipal security has a different rating system?

Municipal notes

What information do investment companies have to disclose with the SEC in their registration?

• whether the investment company will be open or closed end

• the names addresses of affiliated people

• whether the company will borrow money

• their investment plan

• conditions under which their investment plan will change

• business experience of each director and officer

diversified management companies must…

• … not own more than 10% of the outstanding shares of a company

• not use more than 5% of their funds to invest in one company’s securities. However, their stake in that company can appreciate to more than 5% of their funds.

What is the Public Offering Price of a mutual fund?

A mutual fund is an open-end investment fund. Shares of it can be purchased at the net average value price, plus a sales charge.

What is a mutual fund called that does not have a sales charge?

A no-load fund. Sales charge = load.

Summary prospectus

A shortened version of a statutory prospectus, which includes:

• fund’s name

• ticker symbol

• class of shares

• the fund’s investment strategies

• investment objectives

• costs of investing

• investment advisers

• financial compensation

• risks

• performance

• an application for investors to purchase shares

can an investor purchase shares of a mutual fund after reading the summary prospectus?

yes, but they must either be sent a copy of the full prospectus or provided access to it online.

ETFs

Exchange traded funds

These are close-ended funds bought after the initial offering, on an exchange.

what is the most important consideration for customers investing in packaged securities?

The fund’s investment objectives are the most important feature of packaged securities. This determines the risk level of the fund.

Money market fund

A money market fund invests in money market securities.

It usually provides a check-writing feature to redeem shares.

There is never a sales charge.

It computes dividends daily and credits them monthly.

there is no penalty for early redemption.

Income fund

The primary objective of this fund is to provide current revenue to investors through dividends or interest.

These are safer than growth funds.

Balanced fund

This is a fund that is combined between a growth fund and an income fund.

breakpoint sale

A sale that occurs just below the breakpoint. It is illegal to induce this kind of sale.

where are breakpoints disclosed?

in the security prospectus

To whom are breakpoint discounts available?

Breakpoint sales discounts are available to individual investors, joint accounts with family members, UGMA accounts, and corporations. They are not available to partnerships or investment clubs.

letter of intent

A letter of intent (LOI) states that the person will buy shares of that security within a period of time. For the SIE, it usualy applies to mutual funds.

If the person intends to buy enough securities to initiate a breakpoint sale, then they can claim the breakpoint sale discount at the time of writing the LOI, rather than at the time when they purchase the securities.

The investor has 13 months to deposit enough money to meet the breakpoint threshold.

The LOI can be backdated to 90 days for a trade that already occurred, but the 13 months begins on the day of that trade instead of the day the LOI was written.

rights of accumulation breakpoints

These breakpoints provide discounts to shareholders when their accumulated shares in a security have reached the breakpoint threshold level.

This is contrast to breakpoint discounts that only apply to single purchases of a large quantity.

sales charge

Also known as load. Remember that the sales charge must be found as a percentage of the public offering price, not a percentage of the NAV.

NAV/POP + load/POP = POP

Class A load

front-end load

The investors pays the load when purchasing shares of the fund.

These funds are often better for long-term investors because they have lower expense ratios, and have breakpoints for large dollar purchases.

Class B

back-end load

The investors pay the load when redeeming shares of the fund.

They have lower expense ratios than Class A shares, but often convert to Class A if held for a number of years. Not many Class B funds exist.

Class C

level-load

The investors pay a periodic (usually annual) fee over the time period they hold the fund. These funds have higher expense ratios and also have an exit fee (which is usually eliminated after holding the fund for a year or two).

These are good options for short-term investors.

No-load

Investors don’t pay a sales charge but may be charged some sort of transaction fee. However, no-load funds cannot charge a fee greater than 25 basis points, or .025%

Face-amount certificate

Similar to a zero-coupon bond, investors buy certificates at a deep discount and are paid back a larger amount at the date written on the certificate. Not many are around today.

UIT

Unit investment trust

These companies have a fixed (unchanging) portfolio of income-producing securities (typically bonds) and holds them in trust. UITs have no investment advisory fee, as their portfolio is fixed.

UITs have a predetermined termination date. Any capital gains, interest, or dividends are passed on to shareholders at regular intervals.

Investors typically buy in an IPO. UIT units have very low liquidity.

There ared fixed UITs and participating UITs. Fixed UITs are as described above. Participating UITs are also the same, but instead invest in securities such as mutual funds that change their underlying assets.

Exchange-traded products

Any exchange-traded product can be traded on margin and can be sold short.

However, investors will be charged a commission for trades of any ETPs, which is a disadvantage as it can eat into profit.

Inverse ETFs

These are bearish investments, which attempt to profit from a decline in the economy. They invest in derivative products such as options.

Exchange-traded notes

ETNs are unsecured debt securities. They do not pay any fixed income. ETN’s return is dependent on the performance of the market index it is tracking.

The rating of an ETN is dependent on the bank that is issuing it.

ETNs are fairly complex and are not suitable for most investors.

How are affiliated persons of an investment company allowed to interact financially with the company’s portfolio of funds?

They are not allowed to trade securities within the fund’s portfolio. However, they can buy and redeem shares of the fund. They can also trade securities held by funds within the same family of funds.

What are the legal requirements that come with selling variable annuities?

Variable annuities must be registered with the SEC, and investors must be provided with a prospectus. Additionally variable annuity funds are held in a