Which option BEST describes a municipal security known as a certificate of participation (COP)?

The option that describes a certificate of participation (COP) as a type of bond created through a lease agreement is correct because COPs are indeed structured in such a way. Specifically, a COP represents an investor's proportional share in a lease agreement between a government entity and a financing entity. In these arrangements, the government entity leases a facility or an asset, and the payments made under the lease are used to pay back the COP investors.

This structure allows municipalities to finance projects without needing to issue traditional bonds backed by tax revenues. Instead, the lease payments serve to cover the costs associated with the COPs, making them a unique financing mechanism for public projects. Additionally, the use of lease payments often circumvents certain legal or constitutional limits that might apply to bond issuance.

Other options do not fit the definition: describing it as a type of equity security incorrectly implies ownership in a company rather than a governmental financing mechanism, while suggesting it is backed by taxes mischaracterizes its reliance on lease payments. Also, labeling it as a short-term financial instrument does not apply since COPs typically have longer maturities associated with the underlying lease agreements.