CGFO Debt Administration 2 — Questions and Answers
Question 1: Which document formally authorizes a local government to issue bonds by specifying the amount, purpose, and terms?
- Bond resolution (Correct answer)
- Continuing disclosure agreement
- Official statement
- Underwriting agreement
Correct answer: Bond resolution
A bond resolution is the authorizing legal document adopted by the governing body that establishes the terms and conditions of a bond issuance.
Question 2: What is the primary purpose of a debt service reserve fund?
- To fund capital project cost overruns
- To provide funds if revenues are insufficient to make debt service payments (Correct answer)
- To cover underwriter fees at issuance
- To accumulate funds for future refunding
Correct answer: To provide funds if revenues are insufficient to make debt service payments
A debt service reserve fund acts as a safety net, providing liquidity if pledged revenues fall short of scheduled principal and interest payments.
Question 3: Under SEC Rule 15c2-12, which entities are primarily responsible for filing continuing disclosure documents?
- Underwriters
- Rating agencies
- Bond counsel
- Issuers or obligated persons (Correct answer)
Correct answer: Issuers or obligated persons
SEC Rule 15c2-12 requires issuers and obligated persons to file annual financial information and material event notices with MSRB's EMMA system.
Question 4: A government issues $10 million in bonds at a net interest cost of 4.5%. What does the NIC measure?
- The average coupon rate weighted by par amount only (Correct answer)
- The true economic cost including time value of money
- The weighted average interest rate considering the time value of money payments
- The spread between the coupon rate and benchmark Treasury yields
Correct answer: The average coupon rate weighted by par amount only
Net Interest Cost (NIC) is the weighted average interest rate based on par amounts and coupon payments but does not account for the time value of money, unlike True Interest Cost (TIC).
Question 5: Which type of bond is secured solely by the full faith, credit, and taxing power of the issuing government?
- Revenue bond
- General obligation bond (Correct answer)
- Conduit bond
- Tax increment bond
Correct answer: General obligation bond
General obligation bonds are backed by the issuer's unlimited or limited taxing power, making them the broadest security pledge available to a government.
Question 6: What is 'overlapping debt' in government debt analysis?
- Debt issued simultaneously by two jurisdictions for the same project
- The proportionate share of debt from other taxing jurisdictions within the same geographic area (Correct answer)
- Debt that has been refunded but not yet retired
- Revenue bonds that also carry a GO pledge
Correct answer: The proportionate share of debt from other taxing jurisdictions within the same geographic area
Overlapping debt represents the taxpayers' proportionate share of debt issued by other governmental entities (school districts, special districts) that overlap the same taxing area.
Question 7: A government's debt service as a percentage of general fund expenditures is 12%. How is this ratio typically interpreted?
- It indicates the government has no borrowing capacity remaining
- It is within the commonly cited 10-15% caution range, suggesting moderate debt burden (Correct answer)
- It violates GFOA best practice thresholds
- It means the government must immediately refund outstanding bonds
Correct answer: It is within the commonly cited 10-15% caution range, suggesting moderate debt burden
A debt service ratio between 10% and 15% of general fund expenditures is commonly cited as a caution range; above 15% is generally considered high.
CGFO Debt Administration 2
Which document formally authorizes a local government to issue bonds by specifying the amount, purpose, and terms?