Series 7 Exam 2022-2023 For Dummies with Online Practice Tests
Book image
Explore Book Buy On Amazon

The Series 7 will expect you to have a good grasp on types of municipal bonds and notes. Along with standard revenue and GO bonds, you’re required to know the specifics of the following types of municipal bonds:

  • Special tax bonds: These bonds are secured by one or more taxes other than ad valorem (property) taxes. The bonds may be backed by sales taxes on fuel, tobacco, alcohol, and so on.

  • Special assessment (special district) bonds: These bonds are issued to fund the construction of sidewalks, streets, sewers, and so on. Special assessment bonds are backed by taxes only on the properties that benefit from the improvements. In other words, if people who live a few blocks away from you get all new sidewalks, they’ll be taxed for it, not you.

  • Double-barreled bonds: These bonds are basically a combination of revenue and GO bonds. Municipalities issue these bonds to fund revenue-producing facilities (toll bridges, water and sewer facilities, and so forth), but if the revenues taken in aren’t enough to pay off the debt, tax revenues make up the deficiency.

  • Limited-tax general obligation bonds (LTGO): These bonds are types of general obligation bonds for which the taxes backing the bonds are limited. Limited-tax general obligation bonds are secured by all revenues of the municipality that aren’t used to back other bonds. However, the amount of property taxes municipalities can levy to back these bonds is limited.

  • Public housing authority bonds (PHAs): These bonds are also called new housing authority (NHA) bonds and are issued by local housing authorities to build and improve low-income housing. These bonds are backed by U.S. government subsidies, and if the issuer can’t pay off the debt, the U.S. government makes up any shortfalls.

    Because PHAs are backed by the issuer and the U.S. government, they’re considered among the safest municipal bonds.

  • Moral obligation bonds: These bonds are issued by a municipality but backed by a pledge from the state government to pay off the debt if the municipality can’t. Given this additional backing of the state, they’re considered safe. Moral obligation bonds need legislative approval to be issued.

    Because they’re called moral obligation bonds, the state has a moral responsibility — but not a legal obligation — to help pay off the debt if the municipality can’t.

The following question tests your ability to answer questions about the safety of municipal bonds:

Rank the following municipal bonds in order from safest to riskiest.

I. Revenue bonds

II. Moral obligation bonds

III. Public housing authority bonds

IV. Industrial development revenue bonds

(A) I, II, III, IV
(B) III, II, I, IV
(C) II, III, IV, I
(D) II, IV, III, I

The correct answer is Choice (B). If you remember that public housing authority bonds are considered the safest of the municipal bonds because they’re backed by U.S. government subsidies, this question’s easy. Public housing authority bonds would be the safest; moral obligation bonds are also considered very safe because the state government has a moral obligation to help pay off the debt if needed, follow.

Next come revenue bonds, which are backed by a revenue-producing facility. Remember that industrial development revenue bonds (IDRs) are considered the riskiest municipal bonds because although they’re technically municipal bonds, they’re backed only by lease payments made by a corporation.

When municipalities need short-term (interim) financing, municipal notes come into play. These notes bring money into the municipality until other revenues are received. Municipal notes typically have maturities of one year or less (usually three to five months). Know the different types of municipal notes for the Series 7 exam:

  • Tax anticipation notes (TANs): These notes provide financing for current operations in anticipation of future taxes that the municipality will collect.

  • Revenue anticipation notes (RANs): These bonds provide financing for current operations in anticipation of future revenues that the municipality will collect.

  • Tax and revenue anticipation notes (TRANs): These notes are a combination of TANs and RANs.

  • Grant anticipation notes (GANs): These bonds provide interim financing for the municipality while it’s waiting for a grant from the U.S. government. The notes are paid off from the grant funds once received.

  • Bond anticipation notes (BANs): These bonds provide interim financing for the municipality while it’s waiting for long-term bonds to be issued.

  • Construction loan notes (CLNs): These notes provide interim financing for the construction of multifamily apartment buildings.

  • Project notes (PNs): These bonds provide interim financing for the building of subsidized housing for low-income families.

  • Tax-exempt commercial paper: These short-term bonds are usually issued by organizations such as universities with permission of the government. This debt obligation usually lasts only a few months to help the organization cover its short-term liabilities.

AON (all or none) is an order qualifier (fill an entire order at a specific price or not at all) or type of underwriting; it is not a municipal note, no matter how much it looks like one.

Municipal notes are not rated the same as municipal or corporate bonds (AAA, AA, A, and so on). Municipal notes have ratings as follows (from best to worst):

  • Moody’s: MIG 1, MIG 2, MIG 3, MIG 4

  • Standard & Poor’s: SP-1, SP-2, SP-3

  • Fitch: F-1, F-2, F-3

The following question tests your knowledge of municipal notes.

Suffolk County, New York, would like to even out its cash flow. Which of the following municipal notes would Suffolk County MOST likely issue?

(A) RANs
(B) BANs
(C) CLNs
(D) TANs

The answer you want is Choice (D). Because the question doesn’t state that the municipality is constructing housing or issuing long-term bonds, you should cross out Choices (B) and (C). Likewise, you can’t assume that the municipality will be collecting revenues from some project, so Choice (A) is out. However, municipalities collect property taxes at regular intervals, so (D) is the best choice.

About This Article

This article can be found in the category: