Public Finance Superday - Technical Questions?

3rd year analyst here - Congrats on the superday, you can thank me once you have your offer. Prepare like your life depends on it, keep a cool and level head, and you'll do just fine. Here's everything you need to know:

The most important thing you need to do is craft your story and tell it well. What is your past and why would you be good at Public Finance? Are you someone I could have a beer with after work? Are you smart, driven, and most of all disciplined?

Review this website if you haven't already - BondBuyer (.com) - read everything off the front page and any popular articles within the last month or two.

Understand why this September has had insane volumes. Why? Lower cost of capital for clients due to low yields. Wrap your head around this.

Understand the general economy, interest rates (where do you think they're going in the next 6 months and why? Brush up on your basic econ (understand basic monetary policy....why is the fed is going to tighten monetary policy in the next few months? Know basics about overseas interest rates, why negative or near-zero interest rates are a thing. How do Munis track treasuries? How are treasuries affected by the overall economy, both domestic and abroad.

Be prepared for possible brain-teasers...definitely group specific but I got a few in first rounds and in my superday. Can't help you here, good luck.

Review the M&I intro to Public Finance, not terrible idea to get a general idea about the basic role. There is also a good chance you don't get any technicals, so spend 70% of your time working on the fit questions.

Regardless, here are some basic technicals/terms you should be up to speed with:

RFP (Request for proposals): Know what these are and why they are used. Analysts will spend a ton of time on these. Do your own research on this, I can't give you everything.

Understand TAX EXEMPT YIELD

Know your basic bond math...don't need to spend a lot of time here but have a working knowledge of present value and how you discount coupons and the face value.

Repos: Refinancing, essentially. Understand why an issuer would do this.

Term to maturity: Longer term to maturity, the more susceptible to changes in price due to changes in interest rates. Understand the math behind this. • Short term securities – will trade closer to Par (investor will receive full amount sooner). Examples: Notes – 13 months or less, Commercial paper – 270 days or less • Short-term bonds – 1 to 4 years • Long term securities - 12 years or more

Coupon Rates • Higher the coupon rate, the smaller the price movements will be for a given security. Can you solve the math behind this? Give it some thought. • Bonds at a discount experience wider price swings for a given shift in interest rates. If you understand this, you know your stuff.

Par Bond: Interest rate = Yield • Traded at face value. Present value of coupons and face value at maturity is equal to the face value

Callable Bond: Bonds that can be paid off by an issuer prior to the maturity date (payment is face value plus any incurred interest) • Typically have higher coupons • Offers the opportunity to refund at a lower rate in the future (refinance). The industry has seen this a lot recently...why?

What is a 10-year par call?

Discount Rate: Yield to Maturity (YTM is the IRR)

Bond Premium: Basic definition...the price is in excess of the face value of the bond. Why would this occur?

Current Yield: Basic formula - (Coupon Interest Payment/Current Price)

Yield to call: Annual return, compounded semi-annually, that an investor would earn from payments of principal and interest, assuming bonds are redeemed at the call date.

Yield to Worst: Lowest possible yield that a bond can have, given all of its parameters. Lowest between yield to maturity and yield to call.

Yield to Call vs. Yield to maturity Premium vs. Discount • Premium - Yield to call is less than yield to maturity...Think about If you paid more than face value for the bond, you are factoring in the coupon interest payments in YTM. If that bond is called before then, and you’ve paid more than face value, and the premium is spread (amortized) over fewer years

Why would you not call? • Interest on bonds with similar maturities are higher than what the current bonds are paying

Muni Bond Risks (Very Important): Achieving returns always requires risk. Munis are NOT risk free. • Credit Risk: Issuer will not be able to make interest payments or may default. Reflected in the bond rating • Event Risk: Unanticipated risks (catastrophic events) • Political risks: Climate in state and local governments (Tax-limitations, voter rejections of bonds) • Market Risk: Interest rate Risk (Potential prices changes due to changes in interest rates), Inflation Risk( Bond’s value will diminish if there is overall inflation) • Liquidity risk (May have less demand, unable to sell) • Reinvestment Risk

Examples of Revenue Bonds: • Utilities (Power, water, sewage, gas) • Healthcare • Higher-education (Private and Public) • Not-For-Profit (501c3) • Housing -Housing authorities issue bonds for low-income housing • Transportation • Securitized revenue bonds

Implications affecting Municipal issuances • Political pressures (anything that could decrease taxes could decrease the relative attractiveness of municipals to normal bonds - why do you think this is the case?...political backdrop politicians less willing to raise taxes...voter sentiment on General Obligation bonds - how will voters vote on a referendum? Gridlock in state and local legislatures...Increase in federal mandates and decreases in federal funding resources...Municipality's willingness vs. ability to make full debt payments)

Interest Rate Changes on Price - Very basic stuff but I'll repeat it anyway... • If interest rates increase, Muni bond price will decrease • If interest rates decrease. Price will increase

Considerations in Bond Pricing/Issuances • Prevailing interest rates - Higher rates will lower prices (issuers less willing to issue bonds) • Credit ratings - Higher credit rating leads to lower yields, higher prices • Call options • Political considerations

Know competitive vs. Negotiated offerings.

Know a few things about these places: Puerto Rico, Illinois, Chicago Public Schools, San Bernadino, Orange County

Know what prevailing rates are for Treasuries, rates overseas, and look into the MMD (muni index) too.

PubFin doesn't have a vault guide or a M&I 400, so hopefully this can be shared around so people can have a better sense for what the job is and what you'll learn. If this stuff excites you, you'll do fine. If you hate it, at least you'll still have a decent paycheck.

Good Luck.