Local governments in the United States have been issuing municipal bonds since 1812. Municipal bonds help your local governments fund projects to build infrastructure that supports the population. Not only are they a safe and secure investment, they also allow you to support your community. Take this quiz before you consider investing.
Who issues municipal bonds?
U.S. federal government
state and local governments
How do governments typically make use of the money generated by municipal bond issues?
Municipalities use the money to finance the salaries of public works employees.
Municipalities use the money to finance public works projects.
Municipalities use the money to finance purchase of equipment such as fire trucks and snowplows.
What is one attractive investment characteristic of municipal bonds?
Municipal bonds are one of the safest long-term investments.
All municipal bonds are tax-free for U.S. citizens.
Municipal bonds earn compound interest.
What characteristic of municipal bonds can make them a more attractive investment than treasury bonds?
a slightly higher interest rate
most pay compound interest
most are tax-free
What year did the Internal Revenue Service start allowing investors to withhold paying income tax on municipal bond interest?
What are the two most common types of municipal bonds?
long term and short term
compound interest and plain interest
general obligation and revenue
What is the maximum term until maturity for both general obligation and revenue bonds?
How do municipalities raise the money to pay principal and interest to an investor that owns general obligation bonds?
licensing and inspection fees
How do municipalities raise the money to pay principal and interest to an investor that owns revenue bonds?
Revenue bonds are paid off by funds generated by the that project they financed.
Revenue bonds are paid off by collection of a special levy or tax.
Revenue bonds are paid off by grants and equalization payments provided by the Internal Revenue Service.
What is the percentage of municipal bonds that are insured by an insurance company to protect an investor from loss?
almost 70 percent
almost 50 percent
almost 30 percent
What is considered attractive to investors who are considering purchasing floating rate bonds?
Floating rate bonds tend to match the yields of short-term investment notes.
Floating rate bonds pay interest to an investor monthly at the current floating interest rate.
Floating rate bonds have their interest rate reset every year to the average bond market rate.
What is attractive to investors about the structure of a put bond?
A put bond has several maturity dates with guaranteed yields.
A put bond can be put on the market and when it is sold, the interest is paid up to the sale date.
A put bond allows you to put yearly interest payments directly into a money market account.
How would you define a zero coupon municipal bond?
There are no coupons attached to the zero coupon bond certificate.
With a zero coupon bond there is no interest paid until maturity.
A zero coupon bond allows investors to cash-in at any time to receive principal and accrued interest.
What kind of investor could possibly be interested in a zero coupon municipal bond?
Any investor that desires diversity in their investment portfolio would invest in a zero coupon municipal bond.
Zero coupon municipal bonds are unattractive to investors even with their higher rate of interest payment.
Any investor that is saving for retirement would be interested in a zero coupon municipal bond.
What is the advantage of purchasing a taxable municipal bond?
interest calculated quarterly
higher interest rates
What is the benefit of investing in a no tax bond when a taxable bond earns higher interest rates?
The after taxes interest earned on taxable bonds is often less than interest earned on tax-free bonds.
Interest payments on taxable bonds can push an investor into a higher tax bracket negating any interest gain.
Tax-free bonds are always floating rate, over a long-term earned interest will negate the higher interest rate of taxable bonds.
What was the 10-year cumulative default rate for municipal bonds between 1970 and 2000?
less than half of 1 percent
What was the 10-year cumulative default rate for corporate bonds between 1970 and 2000?
less than 1 percent
almost 10 percent
What is one fact about municipal bonds that would likely scare away casual investors?
The minimum price to purchase municipal bonds is typically $5,000 each.
You must engage the services of a broker to make the purchase on your behalf.
You may only purchase municipal bonds without a large fee at the issuers’ municipal office.
What is one of the most important considerations when deciding to purchase a municipal bond?