Municipal Bonds and Notes on the Series 7 Exam

By Steven M. Rice

After you become a licensed registered rep, you may not spend a lot of time selling municipal bonds, but you need to know about them for the Series 7 exam and expect to be tested heavily.

Practice questions

  1. Special tax bonds are

    A. backed by charges on the property that benefits

    B. backed by excise taxes

    C. types of general obligation bonds

    D. types of moral obligation bonds

    Answer: B. backed by excise taxes

    Special tax bonds are a type of municipal bond that’s funded (backed) by taxes on certain items (excise taxes). Excise taxes are taxes on nonessential goods, such as gasoline, alcohol, and tobacco.

  2. Which of the following is true of special assessment bonds?

    A. They are backed by charges on the benefitted property.

    B. They are backed by excise taxes.

    C. They require legislative approval to be issued.

    D. They are backed by a revenue-producing facility.

    Answer: A. They are backed by charges on the benefitted property.

    Special assessment bonds are types of municipal bonds that are backed by taxes on the properties that benefit. For example, say that people who live a few blocks from you got all new streetlights and sidewalks. Why should you pay additional taxes to pay for their streetlights and sidewalks?

    The answer is, you shouldn’t, and that’s where special assessment bonds come into play. In this case, just the properties that benefit will be taxed at a higher level, while yours stays the same.

  3. When purchasing a limited tax general obligation bond, what is limited?

    A. the number of taxpayers backing the bond issue

    B. the type of tax that can be used to back the bond issue

    C. the number of investors who are able to purchase the bond issue

    D. the number of syndicate members who are allowed to sell the bond issue

    Answer: B. the type of tax that can be used to back the bond issue

    A limited tax general obligation bond (LTGO) is typically backed by a specific tax. As an example, an LTGO may be backed by revenue only from sales taxes and not necessarily property taxes. Therefore, LTGOs are riskier investments and would likely have a higher coupon rate than a regular GO bond.