STC Series 7 Chapter 7 Exam 2025
With 100% Correct Answers
A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the
bond is sold six years later, what will be its cost basis?
A. 100
B. 101.50
C. 104.50
D. 106 - CORRECT ANSWER✔✔B. 101.50
When a bond is purchased at a premium (above par value), the premium must be amortized
(reduced) over its life. The premium in this example is six points, which must be amortized over
its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity).
After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101
1/2 (106 original cost - 4 1/2 points amortized premium).
If the auction for auction rate securities fails, the current holder will:
A. Receive the par value of the securities
B. Continue to hold the securities and the interest rate will be set to the maximum rate allowed
in the plan documents
C. Continue to hold the securities and the interest rate will be set to the minimum rate allowed
in the plan documents
D. Continue to hold the securities and the interest rate will be set to a rate of zero - CORRECT
ANSWER✔✔B. Continue to hold the securities and the interest rate will be set to the maximum
rate allowed in the plan documents
A failed auction occurs when there are an insufficient number of bids to cover the amount of
auction rate securities being sold. If this happens, the holders will continue to hold the
securities and the interest rate will be set to the maximum rate allowed in the plan documents.
This rate is normally higher than the rate that would have cleared a successful auction.
,A municipal dealer has a customer's order to purchase bonds on an agency basis. According to
MSRB rules, the customer's order must be executed at:
A. A price that does not exceed 5% of the last reported transaction
B. A price that is fair and reasonable
C. The average price obtained from all dealers contacted
D. The first price obtained - CORRECT ANSWER✔✔B. A price that is fair and reasonable
MSRB rules require that transactions be executed at a price that is fair and reasonable.
A bond swap is done for all of the following reasons, EXCEPT to:
A. Increase the overall yield of the bond portfolio
B. Increase the current income of a bond portfolio
C. Establish a tax loss to offset income
D. Take advantage of a large amount of accrued interest - CORRECT ANSWER✔✔D. Take
advantage of a large amount of accrued interest
A bond swap occurs for all of the reasons given except to take advantage of accrued interest.
The amount of accrued interest is not a factor in a municipal bond purchase or sale
Which TWO of the following choices would be the most suitable purchasers of municipal zero-
coupon bonds?
1. An investor who does not seek present additional cash flow
2. An investor who seeks the tax benefits of long-term capital gains
3. An investor who needs cash for living expenses
4. A custodian account where the parent of the minor child is in the highest tax bracket -
CORRECT ANSWER✔✔B. II and IV
In a custodian account, the minor is technically liable for taxes. Depending on the amount of
income generated in the account and the age of the minor, taxes are calculated at the parents'
,rate. Therefore, parents may consider the purchase of municipal bonds in the custodian account
for tax advantages. The zero-coupon bond will not produce cash flow during the holding period.
This would be desirable for those who do not need cash income. (Funds are needed at a later
date in the custodian account.) The zero-coupon municipal bond would be suitable for other
accounts besides the custodian account, such as upper tax bracket earners during their peak
earning years. Zero-coupon bonds are subject to annual accretion of the investor's cost basis. As
such, at maturity, the investor's cost basis equals the par value of the bond. (There are no
capital gains.) The accretion of the municipal bond is treated as interest income which, in the
case of the municipal bond, is federally tax-free. This is a tax advantage, but it is not a long-term
capital gain.
The term all-or-none, in trading municipal bonds, applies to:
A. Agency transactions
B. Premium bonds
C. Discount bonds
D. Sellers' offering terms - CORRECT ANSWER✔✔D. Sellers' offering terms
Offerings are sometimes made on an all-or-none basis (an AON offering), which is a situation
where the offerer agrees to sell the bonds only if all that he has available will be bought.
A double-barreled municipal bond is backed by the:
A. Revenues of a project
B. Taxes of a municipality
C. Revenues of a project and taxes of a municipality
D. Revenues of the U.S. government - CORRECT ANSWER✔✔C. Revenues of a project and taxes
of a municipality
A double-barreled municipal bond is backed by two sources of income, which would be the
revenues of a project and the taxes of a municipality.
A level debt service bond issue is one in which:
A. Combined annual interest and principal payments are equal
, B. Annual interest payments are equal
C. Annual principal payments are equal
D. All principal is paid at the issue's final maturity - CORRECT ANSWER✔✔A. Combined annual
interest and principal payments are equal
A level debt service bond issue is one in which combined annual interest and principal
payments are equal.
An official statement for a general obligation bond says that property taxes may not be raised
above a certain level. This is known as a:
A. Level debt service bond
B. Double-barreled bond
C. Limited tax bond
D. Moral obligation bond - CORRECT ANSWER✔✔C. Limited tax bond
A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal
and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be
raised.
All of the following statements are TRUE of general obligation (GO) bonds, EXCEPT:
Mark For Review
A. Interest is exempt from federal income tax, but may be subject to state and local tax.
B. The assets of the issuing municipality are used to secure the bonds.
C. The bonds are backed by the taxing authority and full faith and credit of the issuing
municipality.
D. Generally, GO bonds are less risky than revenue bonds. - CORRECT ANSWER✔✔B. The assets
of the issuing municipality are used to secure the bonds.
Interest from a general obligation bond (a type of municipal bond) is exempt from federal
income tax. However, it is generally exempt from state and local taxes only if purchased by a
resident of the state of issuance. In addition, a general obligation bond is backed by the taxing
authority and full faith and credit of the issuer. Unlike a revenue bond, which is backed by a
revenue generating project or facility.
With 100% Correct Answers
A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the
bond is sold six years later, what will be its cost basis?
A. 100
B. 101.50
C. 104.50
D. 106 - CORRECT ANSWER✔✔B. 101.50
When a bond is purchased at a premium (above par value), the premium must be amortized
(reduced) over its life. The premium in this example is six points, which must be amortized over
its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity).
After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101
1/2 (106 original cost - 4 1/2 points amortized premium).
If the auction for auction rate securities fails, the current holder will:
A. Receive the par value of the securities
B. Continue to hold the securities and the interest rate will be set to the maximum rate allowed
in the plan documents
C. Continue to hold the securities and the interest rate will be set to the minimum rate allowed
in the plan documents
D. Continue to hold the securities and the interest rate will be set to a rate of zero - CORRECT
ANSWER✔✔B. Continue to hold the securities and the interest rate will be set to the maximum
rate allowed in the plan documents
A failed auction occurs when there are an insufficient number of bids to cover the amount of
auction rate securities being sold. If this happens, the holders will continue to hold the
securities and the interest rate will be set to the maximum rate allowed in the plan documents.
This rate is normally higher than the rate that would have cleared a successful auction.
,A municipal dealer has a customer's order to purchase bonds on an agency basis. According to
MSRB rules, the customer's order must be executed at:
A. A price that does not exceed 5% of the last reported transaction
B. A price that is fair and reasonable
C. The average price obtained from all dealers contacted
D. The first price obtained - CORRECT ANSWER✔✔B. A price that is fair and reasonable
MSRB rules require that transactions be executed at a price that is fair and reasonable.
A bond swap is done for all of the following reasons, EXCEPT to:
A. Increase the overall yield of the bond portfolio
B. Increase the current income of a bond portfolio
C. Establish a tax loss to offset income
D. Take advantage of a large amount of accrued interest - CORRECT ANSWER✔✔D. Take
advantage of a large amount of accrued interest
A bond swap occurs for all of the reasons given except to take advantage of accrued interest.
The amount of accrued interest is not a factor in a municipal bond purchase or sale
Which TWO of the following choices would be the most suitable purchasers of municipal zero-
coupon bonds?
1. An investor who does not seek present additional cash flow
2. An investor who seeks the tax benefits of long-term capital gains
3. An investor who needs cash for living expenses
4. A custodian account where the parent of the minor child is in the highest tax bracket -
CORRECT ANSWER✔✔B. II and IV
In a custodian account, the minor is technically liable for taxes. Depending on the amount of
income generated in the account and the age of the minor, taxes are calculated at the parents'
,rate. Therefore, parents may consider the purchase of municipal bonds in the custodian account
for tax advantages. The zero-coupon bond will not produce cash flow during the holding period.
This would be desirable for those who do not need cash income. (Funds are needed at a later
date in the custodian account.) The zero-coupon municipal bond would be suitable for other
accounts besides the custodian account, such as upper tax bracket earners during their peak
earning years. Zero-coupon bonds are subject to annual accretion of the investor's cost basis. As
such, at maturity, the investor's cost basis equals the par value of the bond. (There are no
capital gains.) The accretion of the municipal bond is treated as interest income which, in the
case of the municipal bond, is federally tax-free. This is a tax advantage, but it is not a long-term
capital gain.
The term all-or-none, in trading municipal bonds, applies to:
A. Agency transactions
B. Premium bonds
C. Discount bonds
D. Sellers' offering terms - CORRECT ANSWER✔✔D. Sellers' offering terms
Offerings are sometimes made on an all-or-none basis (an AON offering), which is a situation
where the offerer agrees to sell the bonds only if all that he has available will be bought.
A double-barreled municipal bond is backed by the:
A. Revenues of a project
B. Taxes of a municipality
C. Revenues of a project and taxes of a municipality
D. Revenues of the U.S. government - CORRECT ANSWER✔✔C. Revenues of a project and taxes
of a municipality
A double-barreled municipal bond is backed by two sources of income, which would be the
revenues of a project and the taxes of a municipality.
A level debt service bond issue is one in which:
A. Combined annual interest and principal payments are equal
, B. Annual interest payments are equal
C. Annual principal payments are equal
D. All principal is paid at the issue's final maturity - CORRECT ANSWER✔✔A. Combined annual
interest and principal payments are equal
A level debt service bond issue is one in which combined annual interest and principal
payments are equal.
An official statement for a general obligation bond says that property taxes may not be raised
above a certain level. This is known as a:
A. Level debt service bond
B. Double-barreled bond
C. Limited tax bond
D. Moral obligation bond - CORRECT ANSWER✔✔C. Limited tax bond
A GO bond is backed by taxes. The issuer promises to raise taxes, if necessary, to pay principal
and interest on the bonds. A limited-tax GO bond has a ceiling on how high the tax rate may be
raised.
All of the following statements are TRUE of general obligation (GO) bonds, EXCEPT:
Mark For Review
A. Interest is exempt from federal income tax, but may be subject to state and local tax.
B. The assets of the issuing municipality are used to secure the bonds.
C. The bonds are backed by the taxing authority and full faith and credit of the issuing
municipality.
D. Generally, GO bonds are less risky than revenue bonds. - CORRECT ANSWER✔✔B. The assets
of the issuing municipality are used to secure the bonds.
Interest from a general obligation bond (a type of municipal bond) is exempt from federal
income tax. However, it is generally exempt from state and local taxes only if purchased by a
resident of the state of issuance. In addition, a general obligation bond is backed by the taxing
authority and full faith and credit of the issuer. Unlike a revenue bond, which is backed by a
revenue generating project or facility.
