Municipal Securities

The whole unit on one sheet: bond types, tax rules, the math, primary financing, and the dealer-conduct rules the exam loves.

GO vs. Revenue: The Core Split

• Net debt = total debt minus self-supporting debt (revenue bonds paid by user fees, not taxes).
• DSCR = net revenue / annual debt service; a 1.25x minimum is a common rate covenant (a 25% cushion).

Types, Notes, and Special Muni Structures

• Short-term notes bridge cash-flow timing: tax anticipation notes (TANs) repaid from taxes, revenue anticipation notes (RANs) from other revenue, bond anticipation notes (BANs) from future bond proceeds.
• Double-barreled = two sources (revenue plus taxing power); safer than pure GO or pure revenue.
• Moral obligation = non-binding legislative commitment, NOT a legal obligation; riskier than a GO.
• Advance refunded (pre-refunded) bonds are defeased with U.S. Treasuries in escrow; typically rated AAA.
• 529 plans, ABLE accounts, and LGIPs are municipal fund securities under MSRB jurisdiction.

The One-Liners That Win Points

• GO = voter approval + taxing power. Revenue = no vote + project income. The most-tested distinction.
• Overlapping debt is a GO concern, not a revenue concern.
• Gross pledge pays bondholders first; net pledge pays operations and maintenance (O&M) first. Net is the default.
• The rate covenant is the most important protective covenant on a revenue bond.
• In-state muni interest = triple tax-free; out-of-state = federal exempt but state-taxable.
• U.S. territory bonds (Puerto Rico, Guam, USVI) are triple tax-exempt for investors in ALL states.
• Original issue discount (OID) accretes tax-exempt; market discount accretes as taxable ordinary income.
• Municipal interest is tax-exempt, but capital gains are NOT.
• Always quote the LOWER yield on a callable bond (the worst case for the investor).
• Pre-refunded and escrowed-to-maturity bonds are AAA because of the escrowed Treasuries, not the issuer.
• The MSRB writes the rules; FINRA and the SEC enforce them.
• Munis are exempt from SEC registration but NOT from anti-fraud rules.

Numbers to Lock In

Taxable Equivalent Yield (TEY)

• TEY = tax-exempt yield / (1 - marginal tax rate). Most-tested muni math.
• Common trap: multiplying by the tax rate instead of dividing by (1 minus the rate).
• Example: a 4% muni for a 32% bracket investor = 4% / 0.68 = 5.88%.
• In-state (triple tax-free): combine federal and state rates in the denominator (e.g., 32% + 6% = 38%, so 4% / 0.62 = 6.45%). Out-of-state uses the federal rate only.

Primary Financing and Syndicate

• GO bonds = competitive sale (lowest net interest cost or true interest cost wins); revenue bonds = negotiated.
• True interest cost (TIC) accounts for time value of money; net interest cost (NIC) does not.
• Eastern (undivided) account = shared liability for all unsold bonds; Western (divided) = individual liability only. Eastern carries more risk.
• Selling concession is always the largest spread component. Total takedown = underwriting fee + selling concession (excludes the management fee). A non-member dealer earns only the reallowance.

Memory Aid: GO vs. Revenue Pledge and Order Priority

• Gross = bondholders Go first. Net = bondholders are Next (after O&M).
• "Please Get Dessert Made" = Pre-sale, Group, Designated, Member (highest to lowest order priority).

Top Gotchas

• The legal opinion covers legality and tax status only, NOT creditworthiness. Ex-legal bonds trade but are less marketable.
• A limited tax GO caps the tax rate; an unlimited tax GO does not. "Unlimited" refers to taxing power, not borrowing.
• Premium amortization on tax-exempt munis is NOT deductible. At maturity, basis equals par, so no gain or loss.
• AMT applies to private activity bonds, NOT to governmental or 501(c)(3) bonds.
• Bonds in default trade flat (no accrued interest).
• The official statement (OS) goes to EMMA, not the SEC. "Access equals delivery" means notifying the buyer it is on EMMA satisfies the rule; delivery deadline is settlement.
• The BB11 yield is LOWER than the BB20 (AA bonds vs. A-or-above), even though 11 is a smaller number.
• Visible supply is forward-looking (next 30 days); placement ratio is backward-looking (prior week).
• Non-qualified withdrawals from 529 and ABLE accounts trigger income tax PLUS a 10% penalty on earnings.

One-Breath Recap

GO bonds lean on taxing power and a voter referendum, while revenue bonds lean on project income, a feasibility study, and covenants like the rate covenant, with the net pledge assumed unless a gross pledge is stated. Interest is federally tax-exempt and triple tax-free in-state, so run every comparison through the taxable equivalent yield formula, divide by one minus the tax rate, and never treat capital gains or market discount as exempt. Lock in the numbers, know that the MSRB writes and FINRA and the SEC enforce, and the muni questions answer themselves.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Municipal Securities unit for the complete lesson.