General Securities Representative (Series 7) Practice Exam

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What should investors of municipal revenue bonds be most concerned about?

Market volatility
Debt service coverage
Credit ratings
Underwriting processes

The correct answer is: Debt service coverage

Investors in municipal revenue bonds should be particularly concerned about debt service coverage, as it is a key indicator of the bond's ability to generate enough income to cover the interest and principal repayments. Debt service coverage refers to the ratio of cash flow available to the issuer to the necessary debt payments. A strong debt service coverage ratio indicates that the municipality expects to generate sufficient revenue from the project financed by the bonds—such as tolls from a toll road or fees from a public utility—to meet its obligations. If this ratio is low, it could signal potential trouble for the issuer in making timely payments, increasing the risk of default. Municipal revenue bonds are typically backed by the revenues generated from specific projects rather than by general tax revenues, making this coverage a vital metric. Therefore, understanding the bond’s debt service coverage allows investors to assess the security and reliability of the bond's income source before making their investment decision.