Chapter 3 Practice Question Answers
- 1. Answer: B. A bond point is equivalent to 1% of the face value of a bond. For a bond having a face value of $1,000, one point is worth $10. So 1/10 of a bond point is worth $1.
- 2. Answer: A. The spread consists of the manager’s fee plus the total takedown. The total takedown may be further broken down into the additional takedown and the concession fee.
- 3. Answer: A. With an undivided account, also known as an Eastern account, each underwriter is given an initial allotment of the issue to sell. After the order period has ended, if some members have been unable to sell their full allotment, the remaining bonds will be redistributed to every underwriter according to their proportionate share of the total issue. Each member was allotted 20% of the issue. Since 25% of the issue remains unsold (10% each from C and D, 5% from E), this amount is redistributed among the members, with each member receiving one-fifth of the remaining bonds. One-fifth of 25% is 5%.
- 4. Answer: A. The preliminary official statement details the purposes and essential terms and conditions of a municipal bond issue, such as the loan amount, maturity structure of the bond (whether serial or term), and redemption provisions (if the bond is callable). Information not required in the preliminary document includes the offering price of the bonds, the interest rates, selling compensation, and other terms that will be specified in the competitive bids of the underwriters or after the market for the bonds has been tested and assessed.
- 5. Answer: D. In both competitive and negotiated offerings, underwriters of municipal bonds must deliver the preliminary official statement to potential customers whenever requested, within one business day, until a final official statement is available.
- 6. Answer: B. The order period for a municipal bond offering may last anywhere from one hour to five days. This is true for both competitive bids and negotiat