Series 7 Municipal Securities Practice Questions

Correct answer: A. A feasibility study, summarized within the official statement

A feasibility study is an independent engineering/consulting analysis projecting future revenues and demonstrating that the project can generate enough income to cover operating expenses and debt service. It is typically summarized or referenced in the official statement provided to prospective investors in a revenue bond offering.

• AA. An independent projection of whether facility revenues will cover costs and debt service is a feasibility study, and it is typically summarized within the bond's official statement.
• BB. A blue sky memorandum relates to state securities registration compliance, not a revenue feasibility projection, and municipal securities are generally SEC-exempt anyway.
• CC. Bond counsel's legal opinion addresses the bond's legality and tax status, not projected toll revenue sufficiency.
• DD. Form 8-K is a corporate SEC filing mechanism; municipal issuers don't use it, and FINRA isn't the filing recipient for this kind of report.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: B. The firm is barred from engaging in municipal securities business with that issuer for two years

MSRB Rule G-37 imposes a two-year ban on municipal securities business between a dealer and an issuer if an MFP contributes to an official of that issuer in a jurisdiction where the MFP cannot vote, unless the contribution falls within the $250-per-election, per-candidate de minimis exception (available only for contributions to candidates the MFP CAN vote for). Since this MFP cannot vote for the official at all, no de minimis exception applies regardless of the dollar amount, triggering the two-year ban. C and D misstate the actual remedy.

• AA. $500 exceeds the $250 de minimis threshold that applies when the MFP cannot vote for the official, so the contribution is not exempt from consequence.
• BB. Under G-37, a contribution above the de minimis limit to an official the MFP can't vote for triggers a two-year ban on municipal securities business between the firm and that issuer.
• CC. The consequence is a business ban, not a mere disclosure obligation on a routine filing.
• DD. G-37's penalty falls on the firm's ability to do business with the issuer; it does not result in permanent revocation of the individual's securities license.

• Source: MSRB Rule G-37 (Political Contributions and Prohibitions on Municipal Securities Business), accessed October 2026

Correct answer: C. Presale orders

The typical municipal new-issue priority schedule is: (1) presale orders (placed before the bonds are formally awarded to the syndicate), (2) group net orders (benefiting the whole syndicate), (3) designated orders (customer specifies which syndicate member gets credit), and (4) member (individual) orders, which get filled last from any remaining balance.

• AA. Member (individual firm) orders typically receive the lowest priority in the standard municipal syndicate allocation schedule, not the highest.
• BB. Designated orders are generally filled after presale and group net orders in the typical priority schedule.
• CC. Presale orders, submitted before the account is formed, generally receive the highest priority allocation in a competitive municipal underwriting.
• DD. Group net orders typically rank below presale orders in the standard allocation priority.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: C. The taxable, by approximately 0.07 percentage point after federal tax.

After-tax taxable yield = 5.1% x (1 - 0.32) = 3.468%, versus 3.4% for the municipal. The taxable bond is ahead by about 0.07 percentage point.

• AA. This comes from treating the tax amount (5.1% x 0.32 = 1.632%) as the taxable bond's after-tax yield. The after-tax yield is actually 5.1% x 0.68 = 3.468%, which is slightly above the municipal's 3.4%.
• BB. This is the raw 5.1% - 3.4% = 1.7 point gap, which ignores the 32% federal tax on the taxable bond. After tax the taxable yields 3.468%, so the lead is only about 0.07 point.
• CC. 3.468% after tax exceeds 3.4% by roughly 0.07 percentage point.
• DD. This has the right size of gap but the wrong direction. The taxable bond's after-tax yield of 3.468% is above the municipal's 3.4%, so the taxable bond is ahead, not the municipal.

• Source: IRC Section 103 (interest on state and local bonds), accessed October 2026

Correct answer: A. A double-barreled bond

A double-barreled bond is a revenue bond that carries the additional backing of the issuer's general taxing power (a GO-style pledge) as a secondary source of repayment, making it generally viewed as a stronger credit than a pure revenue bond backed only by project income.

• AA. A bond backed primarily by project revenue but with a secondary pledge of the issuer's taxing power is the textbook definition of a double-barreled bond.
• BB. A moral obligation bond involves a non-binding pledge by a state legislature to appropriate funds if needed, a different (and weaker) backing mechanism than a direct tax pledge on a specific revenue bond.
• CC. An industrial development bond is backed by lease payments from a private corporate tenant, not by a municipality's taxing power.
• DD. A special tax bond is secured by a specific, designated tax (like an excise tax), not by the issuer's general taxing power as a backstop.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: B. As ordinary income

Under IRS rules, market discount on a municipal bond that exceeds the de minimis threshold (0.25% of face value per year to maturity) is taxed as ordinary income when realized, not as tax-exempt interest or capital gain. Only discount below the de minimis threshold receives capital gain treatment. A misapplies the bond's tax-exempt coupon treatment to the discount; C and D misstate the rule.

• AA. Unlike coupon interest, market discount above the de minimis threshold is not tax-exempt when realized.
• BB. Market discount in excess of the de minimis amount is taxed as ordinary income when realized, unlike the bond's tax-exempt coupon interest.
• CC. Market discount is treated as ordinary income, not a capital gain, regardless of how long the bond was held.
• DD. The discount becomes taxable when realized (at sale, redemption, or maturity), not only if the position happens to be sold at an overall loss.

• Source: 26 U.S.C. § 1276, accessed October 2026

Correct answer: A. $38 million

Net direct debt equals gross direct debt minus self-supporting debt (debt serviced by a dedicated revenue source such as an enterprise fund's user fees, not general tax revenue): $50M − $12M = $38M. Overlapping debt ($8M × 40% = $3.2M) is a separate add-on used to calculate net overall debt/net direct plus overlapping debt ($38M + $3.2M = $41.2M, choice C). It is not part of "net direct debt" itself. B ignores the self-supporting deduction entirely, and D reflects an incorrect combination of the two adjustments.

• AA. Correct. Net direct debt equals gross direct debt minus self-supporting debt: $50 million − $12 million = $38 million; overlapping debt is a separate concept used only when calculating total overall/overlapping debt, not net direct debt.
• BB. $50 million is the gross direct debt figure before subtracting the self-supporting water utility debt. It overstates the net direct debt.
• CC. $41.2 million appears to improperly fold in the overlapping school district debt, which isn't part of the net direct debt calculation.
• DD. $46 million doesn't correctly net out the self-supporting debt from the gross direct debt figure.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026

Correct answer: D. 5.56%

Taxable-equivalent yield equals the tax-exempt yield divided by (1 - tax rate): 3.5% / 0.63 = 5.56%.

• AA. This multiplies by (1 - rate) instead of dividing.
• BB. This divides by a lower bracket and does not use the 37% rate.
• CC. This is the tax-exempt yield with no tax adjustment.
• DD. 3.5% divided by 0.63 equals about 5.56%.

• Source: Exam outline: FINRA Series 7 Content Outline, accessed October 2026