CGFO Debt Administration 4 — Questions and Answers
Question 1: What does GASB Statement No. 88 require governments to disclose regarding debt?
- The fair value of all long-term debt outstanding
- Additional information about direct borrowings and direct placements of debt (Correct answer)
- The maturity schedule for all bonds issued after 2010
- The credit ratings assigned by all major rating agencies
Correct answer: Additional information about direct borrowings and direct placements of debt
GASB 88 requires enhanced note disclosures for direct borrowings and direct placements, including unused lines of credit, assets pledged as collateral, and acceleration/termination clauses.
Question 2: Which credit rating is the lowest investment-grade rating assigned by Moody's Investors Service?
- BB+
- Baa3 (Correct answer)
- BBB-
- Ba1
Correct answer: Baa3
Moody's lowest investment-grade rating is Baa3; ratings of Ba1 and below are considered speculative or non-investment grade.
Question 3: What is the primary function of the Municipal Securities Rulemaking Board (MSRB)?
- To issue municipal bonds on behalf of state and local governments
- To regulate broker-dealers and municipal advisors in the municipal securities market (Correct answer)
- To provide credit ratings for tax-exempt bond issuances
- To enforce SEC registration requirements for government issuers
Correct answer: To regulate broker-dealers and municipal advisors in the municipal securities market
The MSRB establishes rules governing broker-dealers and municipal advisors operating in the municipal securities market, protecting investors and issuers.
Question 4: Under IRS rules, what is the maximum period during which tax-exempt bond proceeds for a capital project must be spent to avoid rebate liability under the 'spending exception'?
- 6 months
- 18 months
- 3 years (Correct answer)
- 5 years
Correct answer: 3 years
The IRS 3-year spending exception allows issuers to avoid arbitrage rebate if at least 75% of proceeds are spent within 18 months and 100% within 3 years.
Question 5: What is 'arbitrage' in the context of tax-exempt bond compliance?
- The spread between a bond's coupon and its yield to maturity
- Earning investment returns on bond proceeds that exceed the bond's yield, creating a profit from tax-exempt borrowing (Correct answer)
- The difference between a bond's par value and its market price
- Simultaneous purchase and sale of bonds in different markets
Correct answer: Earning investment returns on bond proceeds that exceed the bond's yield, creating a profit from tax-exempt borrowing
Tax-exempt bond arbitrage occurs when an issuer invests proceeds at yields higher than the bond's yield, profiting from the difference between tax-exempt borrowing rates and taxable investment returns.
Question 6: A government is evaluating a refunding. The present value savings are $800,000 and the par amount of refunded bonds is $20 million. What is the PV savings percentage?
- 0.04%
- 4% (Correct answer)
- 40%
- 0.4%
Correct answer: 4%
PV savings percentage = $800,000 / $20,000,000 = 4%, which is typically the minimum threshold GFOA recommends to justify a refunding.
Question 7: Which provision in a bond indenture gives bondholders the right to demand immediate repayment if the issuer violates a covenant?
- Call provision
- Acceleration clause (Correct answer)
- Defeasance provision
- Flow of funds waterfall
Correct answer: Acceleration clause
An acceleration clause allows bondholders or the trustee to declare all principal immediately due and payable upon a covenant violation or event of default.
CGFO Debt Administration 4
What does GASB Statement No. 88 require governments to disclose regarding debt?