CGFO Debt Administration 5 — Questions and Answers
Question 1: What is the purpose of a 'preliminary official statement' (POS) in a municipal bond offering?
- To provide final pricing and coupon rates to investors
- To disclose material information to potential investors before final terms are set (Correct answer)
- To satisfy MSRB Rule G-36 post-sale filing requirements
- To obtain bond counsel's final tax-exempt opinion
Correct answer: To disclose material information to potential investors before final terms are set
The POS discloses financial, legal, and security information to potential investors during the marketing period before final pricing and terms are established.
Question 2: Which measure calculates the total interest cost of a bond issue by discounting all cash flows to the sale date at a single rate?
- Net Interest Cost (NIC)
- Coupon rate
- True Interest Cost (TIC) (Correct answer)
- Yield to call
Correct answer: True Interest Cost (TIC)
True Interest Cost (TIC), also called the Canadian method, is the single discount rate that equates the present value of all debt service cash flows to the bond proceeds received.
Question 3: Under GASB standards, how are general obligation bonds typically reported on a government's financial statements?
- Only in government-wide statements as a current liability
- As long-term liabilities in the government-wide statement of net position (Correct answer)
- As contingent liabilities disclosed in the notes only
- As deferred inflows of resources in the fund financial statements
Correct answer: As long-term liabilities in the government-wide statement of net position
Under GASB, GO bonds are reported as long-term liabilities in the government-wide statement of net position, while governmental fund statements recognize only current maturities.
Question 4: What is a 'private activity bond' test under federal tax law?
- A test to determine if a bond qualifies for the AMT exemption
- A test to determine if more than 10% of bond proceeds benefit private entities, which may affect tax-exempt status (Correct answer)
- A test used by rating agencies to assess revenue bond security
- A test required by MSRB before a negotiated bond sale
Correct answer: A test to determine if more than 10% of bond proceeds benefit private entities, which may affect tax-exempt status
A bond is a private activity bond if more than 10% of proceeds are used for private business use and more than 10% of debt service is secured by or derived from private payments.
Question 5: A government uses a competitive bidding process and receives three bids. How is the winning bidder determined?
- The bidder with the highest bond insurance rating
- The bidder offering the lowest True Interest Cost (TIC) or Net Interest Cost (NIC) as specified in the notice of sale (Correct answer)
- The bidder who submits their offer first
- The bidder approved by the bond counsel as legally compliant
Correct answer: The bidder offering the lowest True Interest Cost (TIC) or Net Interest Cost (NIC) as specified in the notice of sale
In a competitive sale, the issuer awards bonds to the underwriter offering the lowest borrowing cost as measured by TIC or NIC, as specified in the notice of sale.
Question 6: What is a 'conduit borrower' in municipal finance?
- A government that on-lends bond proceeds to a private entity that is the true obligor on the debt (Correct answer)
- A bond insurer that guarantees debt service on behalf of the issuer
- A financial institution that serves as the paying agent for bond principal and interest
- A special purpose vehicle that holds the bond escrow investments
Correct answer: A government that on-lends bond proceeds to a private entity that is the true obligor on the debt
In conduit financing, a government issues bonds and loans the proceeds to a private entity (the conduit borrower), which is ultimately responsible for debt service.
Question 7: Which event must be disclosed within 10 business days under SEC Rule 15c2-12 continuing disclosure requirements?
- Annual filing of audited financial statements
- A rating change on the bonds by a nationally recognized statistical rating organization (Correct answer)
- Publication of the issuer's budget for the upcoming fiscal year
- Election of new governing board members
Correct answer: A rating change on the bonds by a nationally recognized statistical rating organization
Rating changes are among the 16 material events listed under Rule 15c2-12 that require notice filing on EMMA within 10 business days of occurrence.
CGFO Debt Administration 5
What is the purpose of a 'preliminary official statement' (POS) in a municipal bond offering?