Municipal Securities — Series 7 FINRA practice questions

Bonds that trade 'flat' (without accrued interest) include:

1. All investment-grade corporate debt bonds only always
2. Zero-coupon, income bonds, and defaulted bonds now
3. All bonds when the coupon date is close ahead near
4. Only municipal bonds during the trading week only

Answer: B — Zero-coupon, income bonds, and defaulted bonds now

A) Investment-grade bonds pay accrued unless they meet flat criteria. B) Correct — zero-coupon, income, and defaulted bonds trade flat. C) Accrual continues even close to coupon dates. D) Munis pay accrued when trading normally.

Interest on certain municipal industrial development bonds may be subject to which tax?

1. State inheritance tax
2. The federal alternative minimum tax (AMT)
3. FICA payroll tax
4. Federal capital gains tax on the coupon itself

Answer: B — The federal alternative minimum tax (AMT)

B) Correct — IDB interest can be a preference item subject to AMT despite its municipal status. A) Inheritance tax is unrelated to bond interest. C) FICA applies to wages, not bond interest. D) Capital gains tax applies to price appreciation on sale, not the exempt coupon itself.

The key difference between GO bonds and revenue bonds is that:

1. GO bonds are federally taxable; revenue bonds are not
2. GO bonds are backed by taxing power; revenue bonds not
3. Revenue bonds are backed by taxing power; GO bonds not
4. Only revenue bonds are subject to the AMT rules

Answer: B — GO bonds are backed by taxing power; revenue bonds not

A) Both are typically federally tax-exempt. B) Correct — GOs pledge full faith, credit, and taxing power; revenue bonds pledge specific project revenues only. C) Reverses the roles. D) AMT applies only to certain private-activity issues.

A debenture is BEST described as an:

1. Unsecured corporate bond backed by general credit
2. Secured corporate bond backed by specific assets
3. Federal government note issued for infrastructure use
4. Tax-exempt municipal bond issued by a state entity

Answer: A — Unsecured corporate bond backed by general credit

A) Correct — debentures are unsecured, relying on the issuer's general credit. B) That is a secured bond, not a debenture. C) Debentures are corporate, not federal. D) Munis are separate from corporate debentures.

A muni bond's Official Statement corresponds to a corporate:

1. Securities Act prospectus
2. Bond trust indenture
3. Annual audited report
4. Registration exemption filing

Answer: A — Securities Act prospectus

A) Correct — OS is the muni offering document. B) Indentures govern bond terms. C) Annual reports are periodic. D) Munis are exempt from registration.

A municipal revenue bond is backed by the:

1. Full faith and credit of the issuing municipality
2. Federal government's implicit debt guarantee
3. Income from the specific project financed
4. Property tax assessments statewide by state law

Answer: C — Income from the specific project financed

A) That is a GO bond backing. B) Federal government does not back munis. C) Correct — revenue bond debt service comes from project revenues. D) Property tax backs GOs, not revenue bonds.

A revenue bond indenture's 'additional bonds test' primarily protects existing bondholders by:

1. Guaranteeing a fixed coupon regardless of market interest rates
2. Prohibiting the issuer from ever refinancing the debt
3. Requiring the issuer to maintain a minimum AAA credit rating
4. Limiting the issuer's ability to dilute the pledged revenue stream with new debt

Answer: D — Limiting the issuer's ability to dilute the pledged revenue stream with new debt

D) Correct — the test restricts additional debt against the same revenue source, preserving coverage for existing holders. A) Coupon rates are unrelated to this covenant. C) No test requires a specific rating tier. B) Refinancing isn't prohibited outright; the test governs new issuance against the pledge.

Which security represents ownership in a corporation?

1. Common stock
2. Corporate bond
3. Treasury bill
4. Municipal bond

Answer: A — Common stock

A) Correct — common stock is equity, granting residual ownership and voting rights. B) A corporate bond is debt, a loan to the company. C) A T-bill is short-term federal debt. D) A muni bond is state/local debt.

Section 16 filings apply to:

1. All retail investors alike
2. Municipal advisor firms
3. Corporate insiders (10%+)
4. Fund distributor entities

Answer: C — Corporate insiders (10%+)

A) Retail investors are exempt. B) Muni advisors have MSRB rules. C) Correct — directors, officers, 10% holders. D) Distributors have other rules.

An industrial revenue bond (IDR) is typically backed by:

1. The state general fund
2. The corporate lessee credit
3. Direct federal grant support
4. A bank standby letter only

Answer: B — The corporate lessee credit

A) State fund does not back IDRs. B) Correct — corporate lessee's credit. C) Federal grants are not the backing. D) LOCs may enhance but not back.

What is the tax treatment of municipal bond capital gains?

While muni bond interest is tax-exempt, capital gains from selling muni bonds before maturity ARE taxable (short or long-term depending on holding period).

What is a double-barreled bond?

A municipal bond backed by both a specific revenue source AND the full faith and credit (taxing power) of the issuer. Provides dual security.

What is a rate covenant?

A promise by a municipal revenue bond issuer to charge sufficient fees/rates to cover operating expenses and debt service.

What is a sinking fund?

A provision requiring the issuer to retire a portion of the bond issue periodically before maturity, reducing credit risk for bondholders.