Series 7 Exam Question 42: Answer and Explanation

Question: 42

Which of the following municipal bonds allow the municipality to receive tax credit payments from the U.S. Treasury of 35 percent of the amount of interest paid?

  • A. Tax Credit BABs
  • B. Direct Payment BABs
  • C. COPs
  • D. IDRs

Correct Answer: B

Explanation:

B. Direct Payment BABs (Build America Bonds) are bonds issued to fund infrastructure projects (such as bridges, roads, tunnels) where municipalities receive tax credits from the U.S. Treasury of 35 percent of interest paid to investors. This allows municipalities to issue the bonds with higher than usual coupon rates. In tax credit BABs, the investors receive the tax credit instead of the issuer.

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