Chapter 5 Practice Questions
1.Arbitrage, in the context of municipal issuers, refers to:
A.Refinancing debt by issuing new municipal bonds at a lower interest rate and using the proceeds to pay back existing debt
B.The interest income issuers of tax-exempt bonds may be able to earn by investing bond proceeds obtained from the sale of tax-exempt bonds in higher yielding taxable securities
C.A method of resolving disputes that avoids the courts and requires both parties to have already agreed to said method
D.Investing proceeds of higher yielding bonds in lower yielding investments
2.Leadville issues $40,000,000 worth of bonds and wants to lend some of the proceeds to a private business that is building a grocery store in town. What is the maximum amount Leadville can lend without its bonds being considered private activity bonds?
A.$5,000,000
B.$4,000,000
C.$2,000,000
D.Any amount of money lent to a private business will cause the bonds to be considered private activity bonds
3.Which of the following municipal bonds are always tax-exempt?
A.Bank qualified bonds
B.Private activity bonds
C.BABs
D.AMT bonds
4.All of the following are true with regard to the AMT except:
A.It is a federal income tax imposed on wealthy taxpayers.
B.It is imposed only if AMT exceeds regular income tax.
C.Tax preference items such as interest on private activity bonds are excluded from income.
D.No deduction is allowed for state and local taxes.
5.Serena buys an OID bond for $4,800. The par value of the bond is $5,000, and it matures in ten years. Which of the following are true?
I.The discount will be reported as ordinary income.
II.The discount will be reported as capital gain.
III.The discount exceeds the de minimis amount.
IV.The discount does not exceed the de minimis amount.
A.I and III
B.I and IV
C.II and III
D.II and IV
6.The final official statement: