SIE EXAM TUTORING TIPS - MUNICIPAL BONDS

 

 

When preparing for the FINRA Securities Industry Essentials (SIE) exam, understanding debt instruments is crucial. A major component of this is knowing how municipal bonds are taxed. While the interest on almost all municipal bonds is exempt from federal income tax, there are a few important exceptions that FINRA tests. 

 

Working with an expert SIE Exam Tutor can help you easily identify these differences and boost your score. 

 

Test your basic understanding of municipal debt with this introductory sample question: 

 

Which two of the following municipal bonds would NOT be exempt from federal tax? 

 

I. A general obligation bond issued by a state municipality
II. A public-purpose revenue bond issued to build a local sewer system
III. A Build America Bond (BAB)
IV. An industrial development revenue bond (IDR) 

 

A. I and II
B. I and III
C. II and IV
D. III and IV 

 

Correct Answer: D. III and IV 

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To pass the SIE exam, you must understand the basic distinction between public-purpose municipal debt and private-purpose or subsidized municipal debt: 

 

• General Obligation (GO) Bonds: Issued by states or local governments to fund general public projects. They are backed by the full faith, credit, and taxing power of the municipality. The interest income is federally tax-exempt. 

   

• Public-Purpose Revenue Bonds: Issued to fund specific municipal projects like sewer systems, toll roads, or bridges. They are backed by the revenues generated by the facility. The interest income is federally tax-exempt. 

   

• Build America Bonds (BABs): Created to help municipalities raise capital for infrastructure. Unlike traditional municipal bonds, BABs offer direct federal subsidies or tax credits, meaning the interest income generated is fully taxable at the federal level. 

   

• Industrial Development Revenue Bonds (IDRs): Issued by a municipality but constructed for the benefit of a private corporation. Because these bonds serve a private business purpose rather than a broad public use, the interest income is not exempt from federal income taxes. 

   

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