Municipal Debt Characteristics – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
🏛️ Municipal Debt Characteristics – Series 7 Exam
A strong understanding of municipal debt securities is critical for passing the Series 7 Exam. These securities, issued by states, cities, and other local government entities, play a major role in the U.S. bond market — and the exam expects you to know their structure, tax treatment, types, and risks.
This guide summarizes the essential municipal debt characteristics you must master.
📜 What Are Municipal Securities?
- Bonds issued by state or local governments
- Purpose: Finance public projects like highways, schools, and hospitals
- Interest income is generally exempt from federal income tax
- Some issues may also be state and locally tax-exempt (especially if the investor lives in the issuing state)
🏦 Key Characteristics of Municipal Bonds
| Feature | Details |
|---|---|
| Issuer | State governments, counties, cities, special districts |
| Tax Status | Typically federally tax-exempt; sometimes triple tax-exempt for in-state residents |
| Risk Profile | Lower default risk compared to corporate bonds but higher than U.S. Treasuries |
| Interest Payments | Usually semiannual |
| Principal Repayment | At maturity or via serial maturities (scheduled over time) |
| Liquidity | Moderate; varies based on credit rating, issue size, and structure |
🧾 Two Main Types of Municipal Bonds
1. General Obligation Bonds (GOs)
- Backed by the full faith, credit, and taxing power of the issuer
- Fund public projects that do not generate revenue (e.g., schools, parks)
- Requires voter approval in many cases
- Considered lower risk among muni bonds
2. Revenue Bonds
- Repaid from specific project revenues (e.g., tolls from a bridge, hospital fees)
- Does not require voter approval
- Higher risk than GOs due to dependence on project success
- Often includes feasibility studies before issuance
📚 Other Important Municipal Instruments
- Municipal Notes (short-term, such as TANs, RANs, BANs) — used for temporary financing
- Private Activity Bonds — municipal bonds where more than 10% of proceeds benefit a private entity; may be subject to the Alternative Minimum Tax (AMT)
- Certificates of Participation (COPs) — lease financing agreements without voter approval
📈 Risks of Investing in Municipal Bonds
- Credit Risk: Possibility the issuer may default
- Interest Rate Risk: Value of bonds falls when rates rise
- Liquidity Risk: Not all muni bonds are actively traded
- Legislative Risk: Changes in tax laws could impact tax-exempt status
🧠 Example Series 7 Question
Question:
Which of the following municipal bonds would most likely require a feasibility study before issuance?
🅰️ General Obligation bond for a public school
🅱️ Revenue bond for a toll bridge ✅
🅲️ General Obligation bond for a municipal library
🅳️ Tax anticipation note (TAN) issued by a city
Correct Answer: 🅱️
Revenue bonds require feasibility studies to project whether revenue streams will be sufficient to cover bond payments.
📥 Master Municipal Debt for Series 7 Success
Know the structure. Understand the tax advantages. Recognize the risks.
👉 Explore full Series 7 exam prep at FINRA Exam Mastery