Series 7 Municipal Securities Practice Questions
Question 1
Before a municipality issues revenue bonds to finance a new toll bridge, underwriters typically commission an independent report projecting whether toll revenues will be sufficient to cover operating costs and debt service. What is this report called, and where does it typically appear?
- A. A feasibility study, summarized within the official statement
- B. A blue sky memorandum, filed with the SEC
- C. A legal opinion, issued by bond counsel
- D. A Form 8-K, filed with FINRA
Show answer and explanation
Correct answer: A. A feasibility study, summarized within the official statement
A feasibility study is an independent engineering/consulting analysis projecting future revenues and demonstrating that the project can generate enough income to cover operating expenses and debt service. It is typically summarized or referenced in the official statement provided to prospective investors in a revenue bond offering.
- A. An independent projection of whether facility revenues will cover costs and debt service is a feasibility study, and it is typically summarized within the bond's official statement.
- B. A blue sky memorandum relates to state securities registration compliance, not a revenue feasibility projection, and municipal securities are generally SEC-exempt anyway.
- C. Bond counsel's legal opinion addresses the bond's legality and tax status, not projected toll revenue sufficiency.
- D. Form 8-K is a corporate SEC filing mechanism; municipal issuers don't use it, and FINRA isn't the filing recipient for this kind of report.
Question 2
An associated person who qualifies as a municipal finance professional (MFP) contributes $500 to an elected official of a municipal issuer in a jurisdiction where the MFP is not entitled to vote for that official. Under MSRB Rule G-37, what consequence results for the MFP's firm?
- A. No consequence, since $500 is below the reporting threshold
- B. The firm is barred from engaging in municipal securities business with that issuer for two years
- C. The firm must simply disclose the contribution on its next quarterly filing with no further restriction
- D. The MFP loses their securities license permanently
Show answer and explanation
Correct answer: B. The firm is barred from engaging in municipal securities business with that issuer for two years
MSRB Rule G-37 imposes a two-year ban on municipal securities business between a dealer and an issuer if an MFP contributes to an official of that issuer in a jurisdiction where the MFP cannot vote, unless the contribution falls within the $250-per-election, per-candidate de minimis exception (available only for contributions to candidates the MFP CAN vote for). Since this MFP cannot vote for the official at all, no de minimis exception applies regardless of the dollar amount, triggering the two-year ban. C and D misstate the actual remedy.
- A. $500 exceeds the $250 de minimis threshold that applies when the MFP cannot vote for the official, so the contribution is not exempt from consequence.
- B. Under G-37, a contribution above the de minimis limit to an official the MFP can't vote for triggers a two-year ban on municipal securities business between the firm and that issuer.
- C. The consequence is a business ban, not a mere disclosure obligation on a routine filing.
- D. G-37's penalty falls on the firm's ability to do business with the issuer; it does not result in permanent revocation of the individual's securities license.
Question 3
During the order period of a new competitive municipal bond issue, an underwriting syndicate typically allocates bonds according to a priority schedule. Which type of order generally receives the highest allocation priority?
- A. Member (individual firm) orders
- B. Designated orders
- C. Presale orders
- D. Group net orders
Show answer and explanation
Correct answer: C. Presale orders
The typical municipal new-issue priority schedule is: (1) presale orders (placed before the bonds are formally awarded to the syndicate), (2) group net orders (benefiting the whole syndicate), (3) designated orders (customer specifies which syndicate member gets credit), and (4) member (individual) orders, which get filled last from any remaining balance.
- A. Member (individual firm) orders typically receive the lowest priority in the standard municipal syndicate allocation schedule, not the highest.
- B. Designated orders are generally filled after presale and group net orders in the typical priority schedule.
- C. Presale orders, submitted before the account is formed, generally receive the highest priority allocation in a competitive municipal underwriting.
- D. Group net orders typically rank below presale orders in the standard allocation priority.
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A client in a 32% marginal federal bracket compares a 3.4% federally tax-exempt municipal bond with a 5.1% taxable bond of comparable risk and maturity. Ignore state taxes. Which has the higher after-federal-tax yield?
- A. The municipal, because its 3.4% yield exceeds the taxable bond's 3.468% yield after the 32% federal tax is applied.
- B. The taxable, by approximately 1.7 percentage points, because the 32% bracket reduces the municipal's yield rather than the taxable bond's yield.
- C. The taxable, by approximately 0.07 percentage point after federal tax.
- D. They are equivalent, because a 32% bracket makes the 3.4% municipal yield match the taxable bond's after-tax yield.
Show answer and explanation
Correct answer: C. The taxable, by approximately 0.07 percentage point after federal tax.
After-tax taxable yield = 5.1% x (1 - 0.32) = 3.468%, versus 3.4% for the municipal. The taxable bond is ahead by about 0.07 percentage point.
- A. 3.4% is lower than 3.468%, so the municipal does not come out ahead.
- B. The tax reduces the taxable bond's yield; the exempt municipal is not reduced, and the gap is far smaller than 1.7 points.
- C. 3.468% after tax exceeds 3.4% by roughly 0.07 percentage point.
- D. The after-tax yields are 3.468% and 3.4%, which are close but not equal.