STC Series 7 Progress Exam 2B 2025
With 100% Correct Answers
Which of the following municipal securities are MOST likely to be backed by ad valorem taxes?
A. Special assessment bonds
B. State general obligation bonds
C. Certificates of participation
D. School district bonds - CORRECT ANSWER✔✔D. School district bonds
Ad valorem tax is a tax whose amount is based on the value of property (i.e., property tax is a
form of ad valorem tax). Local governments, such as school districts, secure their general
obligation bonds by ad valorem taxes. On the other hand, state G.O. bonds are secured by forms
of taxes other than property taxes (e.g., income and sales tax). Special assessment bonds are
revenue bonds that are backed by assessments that are made on those who directly benefit
from the facilities, such as developing or improving water and sewer systems, sidewalks, and
streets. Certificates of participation (COPs) are lease financing agreements which are typically
issued in the form of tax-exempt or municipal revenue bonds.
Private label CMOs are more likely than government-sponsored CMOs to be subject to which of
the following risks?
A. Extension
B. Prepayment
C. Credit
D. Interest-rate - CORRECT ANSWER✔✔C. Credit
Private label CMOs include mortgages that are issued by banks and are subject to the
creditworthiness of the issuer. By contrast, government-sponsored CMOs are supported by the
government agency that backs them.
, An auction rate security (ARS) is a type of investment that has its interest rate or dividend rate
reset periodically. The reset rate is referred to as the:
A. The limit rate
B. The hold rate
C. The clearing rate
D. The bid rate - CORRECT ANSWER✔✔C. The clearing rate
Based on the bids that are submitted by holders and prospective buyers, the net clearing rate is
set by the auction agent. The net clearing rate is the lowest rate that matches supply and
demand and is sufficient to cover all of the securities that are exposed for sale. After the
deadline for submission of orders, the auction agent assembles all of the orders from the lowest
to the highest bid and determines the net clearing rate. This rate is paid on the entire issue for
the upcoming period.
In the expectation of relatively stable interest rates, which of the following securities would be
purchased for capital appreciation?
A. A 6%, 6-month Revenue Anticipation Note
B. A 7%, 5-year high-grade corporate bond
C. A 6%, 10-year U.S. Treasury note
D. An 8 1/2%, 10-year convertible subordinated debenture - CORRECT ANSWER✔✔D. An 8
1/2%, 10-year convertible subordinated debenture
If interest rates are stable, most bond prices will have little movement. However, a convertible
debenture could show significant price appreciation or depreciation if the underlying equity
changes in value because of the potential to convert. This keeps the bond price in the vicinity of
conversion parity. Parity is achieved when the value of the bond equals the value of the
common stock derived from the conversion.
Which of the following is the highest S&P speculative grade bond rating?
A. BBB
B. Baa
C. BB
With 100% Correct Answers
Which of the following municipal securities are MOST likely to be backed by ad valorem taxes?
A. Special assessment bonds
B. State general obligation bonds
C. Certificates of participation
D. School district bonds - CORRECT ANSWER✔✔D. School district bonds
Ad valorem tax is a tax whose amount is based on the value of property (i.e., property tax is a
form of ad valorem tax). Local governments, such as school districts, secure their general
obligation bonds by ad valorem taxes. On the other hand, state G.O. bonds are secured by forms
of taxes other than property taxes (e.g., income and sales tax). Special assessment bonds are
revenue bonds that are backed by assessments that are made on those who directly benefit
from the facilities, such as developing or improving water and sewer systems, sidewalks, and
streets. Certificates of participation (COPs) are lease financing agreements which are typically
issued in the form of tax-exempt or municipal revenue bonds.
Private label CMOs are more likely than government-sponsored CMOs to be subject to which of
the following risks?
A. Extension
B. Prepayment
C. Credit
D. Interest-rate - CORRECT ANSWER✔✔C. Credit
Private label CMOs include mortgages that are issued by banks and are subject to the
creditworthiness of the issuer. By contrast, government-sponsored CMOs are supported by the
government agency that backs them.
, An auction rate security (ARS) is a type of investment that has its interest rate or dividend rate
reset periodically. The reset rate is referred to as the:
A. The limit rate
B. The hold rate
C. The clearing rate
D. The bid rate - CORRECT ANSWER✔✔C. The clearing rate
Based on the bids that are submitted by holders and prospective buyers, the net clearing rate is
set by the auction agent. The net clearing rate is the lowest rate that matches supply and
demand and is sufficient to cover all of the securities that are exposed for sale. After the
deadline for submission of orders, the auction agent assembles all of the orders from the lowest
to the highest bid and determines the net clearing rate. This rate is paid on the entire issue for
the upcoming period.
In the expectation of relatively stable interest rates, which of the following securities would be
purchased for capital appreciation?
A. A 6%, 6-month Revenue Anticipation Note
B. A 7%, 5-year high-grade corporate bond
C. A 6%, 10-year U.S. Treasury note
D. An 8 1/2%, 10-year convertible subordinated debenture - CORRECT ANSWER✔✔D. An 8
1/2%, 10-year convertible subordinated debenture
If interest rates are stable, most bond prices will have little movement. However, a convertible
debenture could show significant price appreciation or depreciation if the underlying equity
changes in value because of the potential to convert. This keeps the bond price in the vicinity of
conversion parity. Parity is achieved when the value of the bond equals the value of the
common stock derived from the conversion.
Which of the following is the highest S&P speculative grade bond rating?
A. BBB
B. Baa
C. BB
