Prior to issuing any bonds, a municipal issuer must authorize the issuance of the bonds through a bond resolution and obtain a preliminary legal opinion. The bond resolution authorizes the sale of the bonds and describes the issuer’s obligations to the bondholders. The preliminary legal opinion helps to determine how the bonds may be offered.
Municipal officials cannot effectively tend to their duties and try to find investors to purchase the municipality’s debt. As a result, municipal issuers will select an underwriter or a syndicate of underwriters to sell the bonds for them. There are two ways that the issuer may select an underwriter.
The Municipal Securities Rule Making Board or the MSRB is the organization responsible for overseeing the municipal securities industry. The MSRB has no enforcement arm and its only function is to write rules and test questions. As a result, the Series 7 exam will contain a large number of questions relating to municipal securities.
State and local governments will issue municipal bonds in order to help the local governments meet their financial needs. Most municipal bonds are considered to be almost as safe as Treasury securities issued by the federal government. However, unlike the federal government, from time to time an issuer of municipal securities does default. The degree of safety varies from state to state and from municipality to municipality.
An option is a contract between two parties that determines the time and price at which a stock may be bought or sold. The two parties to the contract are the buyer and the seller. The buyer of the option pays money, known as the option’s premium, to the seller. For this premium, the buyer obtains a right to buy or sell the stock depending on what type of option is involved in the transaction. The seller, because they received the premium from the buyer, now has an obligation to perform under that contract. Depending on the option involved, the seller may have an obligation to buy or sell the stock. Series 7 candidates can expect to see 40 to 45 questions on options. Approximately 30 to 35 questions will be on equity options and up to 10 questions will be on non-equity options. We will begin with equity options.
Option strategies that contain positions in more than one option can be used effectively by investors to meet their objective and to profit from movement in the underlying stock price.
A long straddle is the simultaneous purchase of a call and a put on the same stock with the same strike price and expiration month. An option investor would purchase a straddle when they expect the stock price to be extremely volatile and to make a significant move in either direction.
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