Series 7 Exam : Municipal Securities

If IDBs are called because of condemnation, this would be covered under which of the following clauses in the bond indenture? A) Catastrophe. B) Defeasance. C) Refunding. D) Refinancing.

A) Catastrophe. Explanation Condemnation is considered a catastrophe and only applies to revenue bonds. Reference: 3.1.2.2.4 in the License Exam Manual

In a new municipal offering, who is responsible for hiring bond counsel? A) Issuer. B) MSRB. C) Syndicate manager. D) Syndicate members.

A) Issuer Explanation The issuer hires a bond attorney to render an opinion on the prospective municipal offering. Reference: 3.1.3.5 in the License Exam Manual

Debt service on an industrial revenue bond is secured by: A) lease payments paid by a corporation. B) ad valorem taxes. C) special assessments. D) sales taxes.

A) lease payments paid by a corporation. Explanation Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service. Reference: 3.1.2.2.5 in the License Exam Manual

New Housing Authority (NHA) bonds are a relatively safe investment because: A) the U.S. government guarantees a contribution to secure the bonds. B) banks buy these bonds. C) they are backed by the full faith and credit of the issuing municipalities. D) rental income provides a hedge against inflation. Explanation NHAs are considered safe because, in addition to the backing of rental income, they are secured by a subsidy from an agency of the U.S. government. Thus, they are rated AAA.

A) the U.S. government guarantees a contribution to secure the bonds.

Who signs an official statement for a new municipal issue? A) An official or officials of the issuer. B) An officer of the managing underwriter. C) Independent bond counsel. D) An officer of the Municipal Securities Rulemaking Board (MSRB).

A) An official or officials of the issuer. Explanation An official of the issuer, for example, a county treasurer, signs the official statement. Reference: 3.1.3.4 in the License Exam Manual

A customer purchased a full faith and credit bond. This bond would be known as a: A)general obligation bond. B)sinking or surplus fund bond. C)moral obligation bond. D)revenue bond.

A)general obligation bond Explanation General obligation bonds are also known as full faith and credit bonds. Reference: 3.1.2.1 in the License Exam Manual

Long term securities issued by municipalities that use a Dutch auction method to reset short term interest rates known as "clearing rates" are: A) Real Estate Investment Trusts (REITs). B) Auction Rate Securities (ARSs). C) Collateralized Mortgage Obligations (CMOs). D) American Depositary Receipts (ADRs).

B) Auction Rate Securities (ARSs). Explanation Auction Rate Securities (ARSs) are long term securities issued by municipalities that use a Dutch auction to reset interest rates at short term intervals. The reset rate is known as the "clearing rate" and establishes the rate paid during the period following the auction. Reference: 3.1.2.3.2 in the License Exam Manual

New issues of municipal bonds are exempt from each of the following EXCEPT: A) Securities Act of 1933 registration requirements. B) Securities Exchange Act of 1934 antifraud provisions. C) U.S.A. state registration requirements. D) Securities and Futures Authority (SFA) requirements. Explanation Municipal securities are exempt from federal and state registration. However, no security is exempt from the antifraud provisions of federal securities law, including the 1934 Act. The Securities and Futures Authority is a UK regulator and has no application in the United States. Reference: 3.1 in the License Exam Manual

B) Securities Exchange Act of 1934 antifraud provisions.

Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A) Catastrophe clause B) The issue's rating C) Call features D) Flow of funds

B) The issue's rating Explanation There are different sources for bond ratings but they would not be found within the revenue issues protective covenants. The municipality agrees to abide by the covenants and a trustee appointed in the bond indenture supervises the issuer's compliance with them. Some common covenants are: rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features. Reference: 3.1.2.2.4 in the License Exam Manual

Which of the following would NOT be found in a municipal revenue bond resolution? A) Conditions of the maintenance covenant B) Underwriting agreement C) Reporting requirements regarding revenues collected D) Terms of the rate covenant

B) Underwriting agreement Explanation The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant. The underwriting agreement is between the municipality and underwriters and spells out the terms agreed to for the underwriting of a new issue. Reference: 3.1.3.1 in the License Exam Manual

A qualified legal opinion issued for a municipal bond underwriting means that the: A) revenue bond issue has certain debt limitations . B) legal opinion is qualified with restrictions and conditions. C) bond attorney is qualified to express his opinion on the bond. D) bond counsel is considered competent.

B) legal opinion is qualified with restrictions and conditions. Explanation The word "qualified" describes the legal opinion, not the attorney (or bond counsel) who issued it. A qualified legal opinion is one in which the bond counsel expresses reservations about conditions that may affect the bond's status. An unqualified legal opinion is rendered without restriction or condition. Reference: 3.1.3.5 in the License Exam Manual

You have a high-income client who wishes to maximize his after-tax interest income. Which of the following investments might NOT meet your client's objective? A) AA rated GO bond. B) AA rated revenue bond. C) AA rated IDB. D) AA rated municipal note. Explanation Industrial development bonds are private purpose bonds, and the interest income could subject the holder to the alternative minimum tax. Thus, the interest income may not be completely tax free.

C) AA rated IDB.

When Auction Rate Securities reset the yield to be paid in the upcoming period the process used: is a stop loss system. is a Dutch auction. establishes a "clearing rate". guarantees that every bidder will have their order filled. A) II and IV. B) I and III. C) II and III. D) I and IV.

C) II and III. Explanation The process used to reset the interest rate each period for ARSs is called a Dutch auction which is the lowest bid rate at which all of the bonds can be reset, or sold for new issues, at par. This newly established rate is known as the "clearing rate" and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established "clearing rate" will have their orders go unfilled. Reference: 3.1.2.3.2 in the License Exam Manual

Which of the following is limited in the case of a limited tax municipal bond? A) Number of taxpayers. B) Number of bonds issued. C) Type of tax that can be used to service the debt. D) Number of buyers.

C) Type of tax that can be used to service the debt. Explanation A general obligation (GO) bond may be backed by a specific tax. For example, a limited tax GO may be serviced only from sales tax revenue, not income tax revenue. As the source of debt service is limited (it is not backed by the full taxing authority of the issuer), these bonds are sold with higher yields than conventional GOs. Reference: 3.1.2.1.2 in the License Exam Manual

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true EXCEPT: A) the bond issue will mature within the useful life of the sewage plant. B) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used. C) there is no debt limitation on the issue. D) the disbursement of principal and interest payments must be approved semiannually by the state public service commission.

D) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. Explanation This must be a revenue bond because it is not backed by the full taxing authority of the city. Rather, the principal and interest are paid by the users of the facility. The public service commission has no approval power over revenue bond interest and principal payments. Reference: 3.1.2.2.2 in the License Exam Manual

All of the following might lead to an industrial development bond being called EXCEPT: A) funds are available in the surplus account to call the bond. B) the facility is destroyed by a storm. C) interest rates are falling. D) the municipality is approaching a statutory debt limit

The municipality is approaching a statutory debt limit. Explanation An issuer of industrial development revenue bonds is likely to call bonds to reduce interest costs when interest rates are falling, discontinue interest payments if the facility is destroyed by a natural disaster, or reduce debt if funds are available in a surplus account. Industrial development revenue bonds are not affected by issuer's statutory debt limits as they affect the issuance of GO bonds only.