The tax exemption sells a municipal bond, but exam questions live in the fine print: who won the bid, what the escrow holds, how many days of interest the buyer owes and which part of a gain is still taxed.
States, cities and public authorities borrow by selling bonds to dealers, who resell them to investors. Congress created the Municipal Securities Rulemaking Board (MSRB) to protect investors in this market, and it writes the rules those dealers follow. Municipal primary financing uses one of three methods:
- Competitive sale: The issuer invites sealed bids from underwriting syndicates. It awards the bonds to the bid with the lowest interest cost under its stated criteria.
- Negotiated sale: The issuer picks an underwriter first and then negotiates coupons, prices and structure. Negotiated sales through an underwriter the issuer chooses suit revenue bonds and complex deals.
- Private placement: A placement agent sells the bonds directly to a few investors. It acts as agent and never buys the bonds itself.
Common mistakes
- Counting the settlement day itself, or settling T+2. In Example 1, either error gives 72 days and $80.00 instead of 71 days and $78.89.
- Multiplying instead of dividing for TEY. 3.90% × 1.22 = 4.76% understates the correct 5.00%.
- Treating secondary-market discount as tax-free or capital. Above the de minimis amount, the accrued discount is ordinary income, like the $50 in Example 2.
Bottom line
- Competitive sales go to the lowest interest cost bid under a notice of sale; negotiated sales use an issuer-chosen underwriter; G-11 puts customer orders ahead of members' own accounts.
- The OS must reach buyers by settlement under G-32: the underwriter's EMMA filing counts as delivery, but the dealer still sends the OS or an EMMA notice; under G-34, CUSIPs are requested at pricing (negotiated) or right after award (competitive).
- Under Rule 15c2-12 the underwriter confirms the issuer agreed to file annual information by the date in its agreement, and event notices such as payment defaults and rating changes on EMMA within ten business days.
- GO credit rests on population, tax base, economy, collection rates, debt limits and net overall debt ratios; revenue credit rests on coverage, flow of funds, covenants and additional bonds tests.
Exam shortcut
Look for the trigger word before you compute. "Sealed bid" or "notice of sale" means a competitive sale, and "issuer selected the underwriter" means a negotiated sale. For accrued interest, set settlement at trade date plus one business day, then count 30-day months to the day before it. For TEY, divide, and reject any answer below the muni yield. For any discount, run the DECISION box above.
The full lesson (about 4,928 words, 33 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- C22
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