Series 7 practice questionhardDebt Securities — Municipal Bonds — Moral Obligation Bonds
What distinguishes a moral obligation bond from other municipal bonds?
- AThe state legislature has a moral but not legal obligation to appropriate funds to cover shortfalls in the debt service reserve fund✓ Correct answer
- BIt is guaranteed by the federal government
- CIt pays a higher interest rate than all other municipal bonds
- DIt is exempt from both state and federal taxes in all states
Explanation
Why A — The state legislature has a moral but not legal obligation to appropriate funds to cover shortfalls in the debt service reserve fund
Moral obligation bonds are a type of revenue bond where the state legislature has made a non-binding commitment to replenish the debt service reserve fund if it falls below a required level. The legislature is morally, but not legally, obligated to appropriate funds. Because this backing is not legally enforceable, moral obligation bonds carry more risk than GO bonds but may benefit from a higher credit rating than a pure revenue bond.
Turn it into reps
Reading one answer is not the same as being ready
Lucky the Banker is a free practice app with 758+ Series 7 questions, weak-area tracking, and timed mock exams. No credit card, no paywall.
Spot an error in this question or explanation? Tell us — we fix these fast.
Related Investment Information & Recommendations questions
- A double-barreled municipal bond is one that is backed by:
- Industrial development revenue bonds (IDRBs) are issued by municipalities to:
- Special assessment bonds are repaid by:
- An investor in the 32% federal tax bracket is considering a municipal bond yielding 4%. What is the taxable equivalent…
- Treasury bills (T-bills) differ from Treasury notes and bonds in that T-bills:
- Revenue bonds are repaid from:
- Treasury notes have original maturities of:
- General obligation (GO) bonds are backed by: