Chapter Two
Understanding Municipal Finance
(35 questions out of 100)
In order to understand municipal finance, you need to understand what is meant by the terms “municipal” and “securities.” For the Series 50, municipal refers to a local government, such as a city or county, or an entity derived from local government, such as a school system or a water bureau.
The concept of a security is more complicated and perhaps best understood through a legal definition. Lawmakers have defined a security through a decision called “The Howey Decision.” In this decision, the U.S. Supreme Court came up with four characteristics that define a security. A security involves (1) an investment of money that (2) involves a common enterprise (3) in which the investors expect to make a profit and (4) the profits will be derived from the efforts of someone other than the investor.
Specific examples of securities include:
- • Stocks (preferred or common shares)
- • Bonds (corporate, municipal, or Treasury)
- • Mutual funds (regardless of what they invest in)
- • Options (puts, calls, futures, etc.)
- • Oil and gas partnerships
- • Certificates of deposit for a security (American Depository Receipts (ADRs) and Global Depository Receipts (GDRs))
- • Voting trust certificates
- • Warrants or rights for a security
- • Pass-through certificates (mortgage-backed securities (MBSs))
- • Investment contracts
- • Real Estate Investment Trusts (REITs)
The following are not considered securities:
- •