The key to ace-ing the questions on municipal securities is to know the vocabulary terms inside out and use what you know to do process-of-elimination with the answer choices. Luckily, the terms used in connection with municipal securities always mean exactly what they seem to mean. Except when they mean something different.
Seriously, the terms are usually pretty much what they sound like. For example, what would a "debt service coverage ratio" be? If you know that debt service is the interest and the part of the principal to be paid this year on the revenue bonds, you're half-way home. What would an "agreement among underwriters" be? If you know what underwriters are (syndicate members) and understand what they would care about--and not care about--you can figure out the answer. They don't care about the bond counsel, right? They care about the terms of syndicate operation, the participation of the members, the order priority, the spread, and the deadline for taking orders, etc. If you know that "primary" market = new issues and "secondary" market = trading, you can get a lot of questions right just from that.
Use the bold-letter terms in your textbook and the glossary--if it has one. But to really take it up a notch, use the MSRB's excellent glossary at www.msrb.org.
Showing posts with label municipal securities. Show all posts
Showing posts with label municipal securities. Show all posts
Thursday, February 3, 2011
Friday, January 29, 2010
More Muni's in the Real World
I've posted on this theme before, but I'm constantly amazed how much of a connection there is between my daily life and municipal bonds. Across the street from this office sits an old brick industrial facility that was supposed to be turned into a townhouse/condo development. Unfortunately, the developers borrowed $15 million but sold only 1 unit, and now the property sits in foreclosure, owned by a very unhappy bank. So, the Park District, with land that presses right up to the property, would like to use the building for offices, conference rooms, exercise rooms, and also some green space after tearing down part of the structure. They need $6 million to acquire the property and, therefore, want to issue $6 million of municipal bonds. Next Tuesday, Forest Parkers like me will vote yea or nay to allow the Park District to raise our property taxes slightly in order to create the money needed to retire a $6 million bond issue. I'm kind of tired of seeing the old, useless structure across the street, and green space is a rare commodity in this densely-packed community. I plan to vote "yea." Senior citizens will probably vote "no," based on their argument that "we don't use it; why should we pay for it?" Nice to see how much today's seniors care about the youth of their community--as if an extra $75 a year in property taxes is really going to impact anyone.
On another note, I see that the Cubs are threatening to move their spring training facility from Arizona to Florida. I invite you to read this article from the Bond Buyer yourself. As before, you will see that municipal bonds impact our daily lives, far outside the scope of the Series 7 Exam. The Bond Buyer article is at:
Friday, November 13, 2009
Municipal Securities and the So-Called "Real World"
It always amazes me to hear Series 7 classroom instructors tell students that the Series 7 "has nothing to do with the real world."
Nothing could be further from the truth. As you'll see from the link below, the Series 7 material that you're studying about municipal securities is unfolding right across the street from my office. Across the street sits an old brick industrial building that was almost converted into lofts, condos, and townhomes except that the real estate market--as you may have heard--sort of went south before they could sell any of the units. I watched a few work crews install hundreds of windows and sandblast the original wooden beams, but this project never even got off the ground after that. The developers borrowed $15 million with nothing to show for it, and the lenders have sued to foreclose on the property.
A very familiar story playing out across America, isn't it?
What does this have to do with municipal securities? As you'll see from the article at the link below, the local park district now wants to purchase that huge former industrial campus with our tax dollars and use it for office space and recreational facilities. They'll have to borrow a ton of cash to buy the property now in foreclosure, and they'll do so only if we taxpayers vote "yes" in February to let them issue these municipal bonds backed by an increase in our property taxes. If the majority determines that tax payers should pay a few hundred bucks more a year in property taxes in order to expand the park system, the bonds will be issued. If the majority votes "no," the issue will die temporarily, until the politicians can think of another plan. It's kind of shocking to see how the village played their hand on this one. The village dragged out the development of the "Roos building" painfully by requiring all kinds of variances and rejecting round after round of architectural changes . . . by the time the developers got the village council to approve the project, the real estate market had completely turned south and--oopsie--no interested buyers at this time.
Now that the building is in foreclosure, that same local government steps in to buy it at a discount. Then again, this is basically Chicago here. I mean, you can see the Sears Tower by stepping outside and looking to your right. But it seems like some pretty strong-armed tactics for a village government to take just the same.
In any case, if you'd like to see how the same Series 7 material you're studying is unfolding right outside my office window, click on the link below:
http://www.forestparkreview.com/main.asp?SectionID=1&SubSectionID=38&ArticleID=4504
Nothing could be further from the truth. As you'll see from the link below, the Series 7 material that you're studying about municipal securities is unfolding right across the street from my office. Across the street sits an old brick industrial building that was almost converted into lofts, condos, and townhomes except that the real estate market--as you may have heard--sort of went south before they could sell any of the units. I watched a few work crews install hundreds of windows and sandblast the original wooden beams, but this project never even got off the ground after that. The developers borrowed $15 million with nothing to show for it, and the lenders have sued to foreclose on the property.
A very familiar story playing out across America, isn't it?
What does this have to do with municipal securities? As you'll see from the article at the link below, the local park district now wants to purchase that huge former industrial campus with our tax dollars and use it for office space and recreational facilities. They'll have to borrow a ton of cash to buy the property now in foreclosure, and they'll do so only if we taxpayers vote "yes" in February to let them issue these municipal bonds backed by an increase in our property taxes. If the majority determines that tax payers should pay a few hundred bucks more a year in property taxes in order to expand the park system, the bonds will be issued. If the majority votes "no," the issue will die temporarily, until the politicians can think of another plan. It's kind of shocking to see how the village played their hand on this one. The village dragged out the development of the "Roos building" painfully by requiring all kinds of variances and rejecting round after round of architectural changes . . . by the time the developers got the village council to approve the project, the real estate market had completely turned south and--oopsie--no interested buyers at this time.
Now that the building is in foreclosure, that same local government steps in to buy it at a discount. Then again, this is basically Chicago here. I mean, you can see the Sears Tower by stepping outside and looking to your right. But it seems like some pretty strong-armed tactics for a village government to take just the same.
In any case, if you'd like to see how the same Series 7 material you're studying is unfolding right outside my office window, click on the link below:
http://www.forestparkreview.com/main.asp?SectionID=1&SubSectionID=38&ArticleID=4504
Tuesday, October 27, 2009
Taxation on OID municipal bonds
A Series 7 customer just emailed me to question the tax treatment for original issue discount (OID) municipal bonds. To be honest, I've never felt 100% comfortable teaching on this topic and should have done some research on it a long time ago. So, no matter how dry an email about the veracity of taxation on original issue discount municipal securities might seem, I was actually quite pumped to dive in. Luckily, I've been doing so much searching at http://www.irs.gov/ lately that I was able to find what I needed in less than one minute. And, luckily, all I needed was Publication 550. That, plus a handful of Excedrin, the reading skills of an attorney, and the patience of Job. But, in the end I was rewarded by knowing that the way I teach taxation on discounted municipal bonds is, apparently, exactly right. I also noticed that I do, apparently, provide a useful service for Series 7 candidates by taking nearly incomprehensible English and making sense of it. In my Pass the 7 book, I try to keep it simple. In the book, my job is to tell you that an original issue discount (OID) municipal bond is treated differently from a STRIP. Since the interest on a STRIP is taxable, you have to report some interest income you haven't actually received on 1099-OID each year and pay tax on it. But, a muni is tax-exempt; therefore, you don't have to pay tax on anything and don't have to file anything. If you sell the bond before maturity, you get to step up your cost-basis to help reduce or eliminate a capital gain on the bond. I also then point out that when you buy a tax-exempt (muni) bond at a discount from an investor, things are wholly different. Now, that discount is taxable . . . as ordinary income!
Turns out, that is exactly right, no matter how strange it seems. But what really struck me is how difficult it is to get that all from the orginal bureaucratic, legalistic version. This is how the IRS explains what I just wrote above (From Publication 550) :
Original issue discount. Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest. If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of the OID to figure gain or loss.
Discounted tax-exempt obligations. OID on tax-exempt obligations is generally not taxable. However, when you dispose of a tax-exempt obligation you must accrue OID on the obligation to determine its adjusted basis. The accrued OID is added to the basis of the obligation to determine your gain or loss.
Market discount. Market discount on a tax-exempt bond is not tax-exempt. If you bought the bond after April 30, 1993, you can choose to accrue the market discount over the period you own the bond and include it in your income currently, as taxable interest. If you do not make that choice, or if you bought the bond before May 1, 1993, any gain from market discount is taxable.
I guess what also struck me was how much I enjoyed reading Publication 550 and how much I, apparently, need to find myself a hobby.
Turns out, that is exactly right, no matter how strange it seems. But what really struck me is how difficult it is to get that all from the orginal bureaucratic, legalistic version. This is how the IRS explains what I just wrote above (From Publication 550) :
Original issue discount. Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest. If the bonds were issued after September 3, 1982, and acquired after March 1, 1984, increase the adjusted basis by your part of the OID to figure gain or loss.
Discounted tax-exempt obligations. OID on tax-exempt obligations is generally not taxable. However, when you dispose of a tax-exempt obligation you must accrue OID on the obligation to determine its adjusted basis. The accrued OID is added to the basis of the obligation to determine your gain or loss.
Market discount. Market discount on a tax-exempt bond is not tax-exempt. If you bought the bond after April 30, 1993, you can choose to accrue the market discount over the period you own the bond and include it in your income currently, as taxable interest. If you do not make that choice, or if you bought the bond before May 1, 1993, any gain from market discount is taxable.
I guess what also struck me was how much I enjoyed reading Publication 550 and how much I, apparently, need to find myself a hobby.
Thursday, October 22, 2009
Municipal Securities Question
When studying for the Series 7, it would be nearly impossible to work "too many" municipal securities practice questions. Remember that you will see at least as many questions on municipal securities as you see on options. And, options are much easier to work with--once you understand how they work, it makes no difference how they ask the question. With municipal securities questions, you're often struggling to recall an arcane vocabulary word, or the question is extremely vague. How would you answer the following question on municipal securities?
Which of the following represent(s) an accurate statement?
A. Municipal bonds are traded on a highly liquid secondary market
B. Some municipal bonds pay interest that is non-tax-exempt at the federal level
C. Municipal bonds are exempt from registration requirements
D. All choices listed
First, municipal securities are not highly liquid; in fact, many are illiquid. The school district in which I live recently raised $2,000,000 by selling municipal securities. That means if the bonds were par value of $1,000, there were only 2,000 bonds issued. If the bonds were $5,000 par value, there are only 400 bonds in the entire issue. There is no way that thing could have a liquid secondary market. Secondly, most but not all municipal bonds pay tax-exempt interest. I have an official statement from the City of New York here on my desk. One issue is for $9.2 billion and is described as tax-exempt by the bond counsel. The other issue is for a mere $80 million and is not tax-exempt. Perhaps if I were more curious about the Internal Revenue Code I would track down why the second issue is not tax-exempt, but I'm not, so I won't. But I can now eliminate Choice A and Choice B and, therefore, Choice D has to go, as well.
Leaving me with my answer: C
Which of the following represent(s) an accurate statement?
A. Municipal bonds are traded on a highly liquid secondary market
B. Some municipal bonds pay interest that is non-tax-exempt at the federal level
C. Municipal bonds are exempt from registration requirements
D. All choices listed
First, municipal securities are not highly liquid; in fact, many are illiquid. The school district in which I live recently raised $2,000,000 by selling municipal securities. That means if the bonds were par value of $1,000, there were only 2,000 bonds issued. If the bonds were $5,000 par value, there are only 400 bonds in the entire issue. There is no way that thing could have a liquid secondary market. Secondly, most but not all municipal bonds pay tax-exempt interest. I have an official statement from the City of New York here on my desk. One issue is for $9.2 billion and is described as tax-exempt by the bond counsel. The other issue is for a mere $80 million and is not tax-exempt. Perhaps if I were more curious about the Internal Revenue Code I would track down why the second issue is not tax-exempt, but I'm not, so I won't. But I can now eliminate Choice A and Choice B and, therefore, Choice D has to go, as well.
Leaving me with my answer: C
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