LOS g, (Part 1): Describe the types of securities issued by municipalities in the United States.

Q1. Which of the following statements concerning municipal securities is FALSE?

A)   Investors may be taxed on any capital gains on municipal securities.

B)   All interest on municipal securities is tax-exempt at the federal level.

C)   A moral obligation bond has no legally binding requirement to be repaid.

Q2. Which of the following statements about fixed income securities is least accurate?

A)   The main innovation of CMO is that they offer stable maturities to investors.

B)   Coupon interest and capital gains from municipal bonds are tax exempt at the federal level.

C)   The corporate bond sector is more important in the US than in Japan and Germany.

Q3. Which of the following statements concerning municipal bonds is FALSE?

A)   Before-tax yields on municipal bonds are usually lower than before-tax yields on Treasury bonds.

B)   Municipal bonds have lower risk than Treasury bonds because of their lower yield.

C)   The vast majority of municipal bonds sell at lower yields because their bond interest is exempt from federal income tax.

Q4. Which of the following statements about municipal bonds is least accurate?

A)   Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

B)   A municipal bond guarantee is a form of insurance provided by a third party other than the issuer.

C)   Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

LOS g, (Part 1): Describe the types of securities issued by municipalities in the ffice:smarttags" />United States.fficeffice" />

Q1. Which of the following statements concerning municipal securities is FALSE?

A)   Investors may be taxed on any capital gains on municipal securities.

B)   All interest on municipal securities is tax-exempt at the federal level.

C)   A moral obligation bond has no legally binding requirement to be repaid.

Correct answer is B)

Some interest on municipal bonds, such as municipal bond issues to build stadiums/arenas, is taxable at the federal level. Note though that most municipal bonds are tax-exempt – taxable munis tend to be the exception rather than the rule.

Q2. Which of the following statements about fixed income securities is least accurate?

A)   The main innovation of CMO is that they offer stable maturities to investors.

B)   Coupon interest and capital gains from municipal bonds are tax exempt at the federal level.

C)   The corporate bond sector is more important in the US than in Japan and Germany.

Correct answer is B)

Coupon or interest income is exempt from federal income taxes. Capital gains taxes associated with municipal bonds are not exempt from federal taxes.

Q3. Which of the following statements concerning municipal bonds is FALSE?

A)   Before-tax yields on municipal bonds are usually lower than before-tax yields on Treasury bonds.

B)   Municipal bonds have lower risk than Treasury bonds because of their lower yield.

C)   The vast majority of municipal bonds sell at lower yields because their bond interest is exempt from federal income tax.

Correct answer is B)

Treasury bonds are considered default free and have the least amount of risk. After-tax yields are highest for individuals in the highest tax bracket who benefit the most from the municipal bond’s tax-exempt status. Before tax yields on municipal bonds are lower due to their tax shield.

Q4. Which of the following statements about municipal bonds is least accurate?

A)   Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

B)   A municipal bond guarantee is a form of insurance provided by a third party other than the issuer.

C)   Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

Correct answer is A)

General obligation bonds are backed by the full faith, credit, and taxing power of the issuer.

LOS g, (Part 1): Describe the types of securities issued by municipalities in the ffice:smarttags" />United States.fficeffice" />

Q1. Which of the following statements concerning municipal securities is FALSE?

A)   Investors may be taxed on any capital gains on municipal securities.

B)   All interest on municipal securities is tax-exempt at the federal level.

C)   A moral obligation bond has no legally binding requirement to be repaid.

Correct answer is B)

Some interest on municipal bonds, such as municipal bond issues to build stadiums/arenas, is taxable at the federal level. Note though that most municipal bonds are tax-exempt – taxable munis tend to be the exception rather than the rule.

Q2. Which of the following statements about fixed income securities is least accurate?

A)   The main innovation of CMO is that they offer stable maturities to investors.

B)   Coupon interest and capital gains from municipal bonds are tax exempt at the federal level.

C)   The corporate bond sector is more important in the US than in Japan and Germany.

Correct answer is B)

Coupon or interest income is exempt from federal income taxes. Capital gains taxes associated with municipal bonds are not exempt from federal taxes.

Q3. Which of the following statements concerning municipal bonds is FALSE?

A)   Before-tax yields on municipal bonds are usually lower than before-tax yields on Treasury bonds.

B)   Municipal bonds have lower risk than Treasury bonds because of their lower yield.

C)   The vast majority of municipal bonds sell at lower yields because their bond interest is exempt from federal income tax.

Correct answer is B)

Treasury bonds are considered default free and have the least amount of risk. After-tax yields are highest for individuals in the highest tax bracket who benefit the most from the municipal bond’s tax-exempt status. Before tax yields on municipal bonds are lower due to their tax shield.

Q4. Which of the following statements about municipal bonds is least accurate?

A)   Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

B)   A municipal bond guarantee is a form of insurance provided by a third party other than the issuer.

C)   Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

Correct answer is A)

General obligation bonds are backed by the full faith, credit, and taxing power of the issuer.