Thursday, October 22, 2009

Municipal Securities Question

When studying for the Series 7, it would be nearly impossible to work "too many" municipal securities practice questions. Remember that you will see at least as many questions on municipal securities as you see on options. And, options are much easier to work with--once you understand how they work, it makes no difference how they ask the question. With municipal securities questions, you're often struggling to recall an arcane vocabulary word, or the question is extremely vague. How would you answer the following question on municipal securities?

Which of the following represent(s) an accurate statement?
A. Municipal bonds are traded on a highly liquid secondary market
B. Some municipal bonds pay interest that is non-tax-exempt at the federal level
C. Municipal bonds are exempt from registration requirements
D. All choices listed

First, municipal securities are not highly liquid; in fact, many are illiquid. The school district in which I live recently raised $2,000,000 by selling municipal securities. That means if the bonds were par value of $1,000, there were only 2,000 bonds issued. If the bonds were $5,000 par value, there are only 400 bonds in the entire issue. There is no way that thing could have a liquid secondary market. Secondly, most but not all municipal bonds pay tax-exempt interest. I have an official statement from the City of New York here on my desk. One issue is for $9.2 billion and is described as tax-exempt by the bond counsel. The other issue is for a mere $80 million and is not tax-exempt. Perhaps if I were more curious about the Internal Revenue Code I would track down why the second issue is not tax-exempt, but I'm not, so I won't. But I can now eliminate Choice A and Choice B and, therefore, Choice D has to go, as well.
Leaving me with my answer: C

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