Browse Series 6

Master Municipal Securities for the Series 6 Exam

Explore municipal bonds, tax advantages, and investor suitability in-depth. Perfect preparation for FINRA Series 6 exam.

Understanding Municipal Securities§

Municipal securities are an essential topic for those preparing for the FINRA Series 6 exam. These debt securities are issued by governmental entities to fund public projects such as schools, highways, and other infrastructure. Understanding municipal securities, including general obligation (GO) bonds and revenue bonds, is crucial for advising clients effectively.

General Obligation Bonds§

General Obligation (GO) Bonds are primarily backed by the full faith and credit of the issuing municipality. This means they are supported by the issuer’s taxing power, making them relatively lower-risk compared to revenue bonds.

Key Characteristics:§

  • Taxing Authority: Income to repay GO bonds may come from property taxes or other local taxes.
  • Voter Approval: Often require approval from voters since they impact tax rates.
  • Security: Considered safer due to the backing by taxing power.

Example: A city issuing a GO bond to build a new public school, which is funded by an increase in property taxes, illustrates how these bonds function.

Revenue Bonds§

Revenue Bonds differ from GO bonds as they are supported by specific project revenues. Common projects include toll roads, utilities, and hospitals.

Key Characteristics:§

  • Revenue Source: These bonds repay from the income generated by the financed project.
  • Higher Risk: No general tax backing, only the project’s revenue backs the bond.
  • Project-Specific: More frequent for public utility projects or toll roads.

Example: A state issuing a revenue bond for a toll road project, with pledges of toll revenues to repay the bond, exemplifies this bond type.

Tax Advantages of Municipal Bonds§

Municipal bonds often enjoy favorable tax treatment. Interest income from these bonds is usually exempt from federal income tax and, in some cases, state and local taxes if the investor resides in the issuing state. This makes them particularly appealing for investors in higher tax brackets.

Here’s a formula showcasing tax-equivalent yield:

Tax-Equivalent Yield=Municipal Bond Yield1Tax Rate \text{Tax-Equivalent Yield} = \frac{\text{Municipal Bond Yield}}{1 - \text{Tax Rate}}

Suitability for Certain Investors§

Municipal bonds are ideal for risk-averse investors seeking steady, tax-advantaged income. They suit those in higher tax brackets due to their tax-exempt status. However, the investor’s specific tax situation and investment strategy should be considered when recommending these products.

Visual Aid§

Practice Questions§


Glossary§

  • General Obligation Bonds: Bonds supported by the full faith and credit of the issuer with taxing power.
  • Revenue Bonds: Bonds backed by revenue from specific projects like utilities or tolls.
  • Tax-Exempt Interest: Interest income that is not subject to federal income tax.
  • Tax-Equivalent Yield: The pre-tax yield that a taxable bond must offer to equal the yield on a tax-free bond.

Additional Resources§

  • FINRA Series 6 Exam Guide
  • Municipal Bond Investing Basics
  • Understanding Tax Benefits of Municipal Securities

Final Summary§

To effectively prepare for the Series 6 exam, understanding municipal securities, including general obligation and revenue bonds, is critical. Recognize their structure, tax advantages, and ideal investor profiles. Practicing with the provided quizzes can solidify knowledge and boost exam success.

Tuesday, October 1, 2024