GAC GAC Debt Management & Capital Financing 1 — Questions and Answers
Question 1: Which type of municipal bond is backed solely by the issuing government's pledge of its full faith, credit, and taxing power?
- Revenue bond
- General obligation bond (Correct answer)
- Special assessment bond
- Moral obligation bond
Correct answer: General obligation bond
General obligation (GO) bonds are backed by the issuer's taxing power and full faith and credit, making them generally considered lower risk than revenue bonds.
Question 2: A revenue bond issued by a municipal water utility would typically be repaid from:
- General property tax collections
- Federal grants
- User charges collected from water customers (Correct answer)
- State income tax allocations
Correct answer: User charges collected from water customers
Revenue bonds are repaid solely from the revenues generated by the specific enterprise or project for which they were issued, not from general tax revenues.
Question 3: Under GASB standards, long-term debt of a government is reported in which financial statement?
- Governmental fund balance sheet only
- Statement of Net Position (government-wide) (Correct answer)
- Budgetary comparison schedule
- Notes to the financial statements only
Correct answer: Statement of Net Position (government-wide)
Long-term liabilities, including bonds payable, are reported in the government-wide Statement of Net Position because it uses full accrual accounting.
Question 4: A government issues $10 million in bonds at a premium. What does a bond premium indicate?
- The stated interest rate is lower than the market interest rate
- The stated interest rate is higher than the market interest rate (Correct answer)
- The bonds were issued below par value
- The government has a poor credit rating
Correct answer: The stated interest rate is higher than the market interest rate
A bond premium occurs when the stated (coupon) rate exceeds the current market rate, causing investors to pay more than face value to acquire the higher-yield security.
Question 5: Which federal law requires state and local governments to obtain voter approval before issuing most general obligation bonds?
- The Securities Exchange Act of 1934
- State constitutional and statutory debt limitation laws (Correct answer)
- The Truth in Lending Act
- GASB Statement No. 34
Correct answer: State constitutional and statutory debt limitation laws
Most states have constitutional or statutory provisions requiring voter approval for general obligation bond issuances because they pledge the government's taxing power.
Question 6: Debt service coverage ratio is an important metric for revenue bond issuers because it measures:
- The percentage of debt paid off in the current year
- The ratio of net revenues available to required debt service payments (Correct answer)
- The total outstanding principal balance relative to assessed property value
- The government's credit rating as assigned by a rating agency
Correct answer: The ratio of net revenues available to required debt service payments
Debt service coverage ratio measures how many times the available net revenues cover the required debt service, indicating the bond's repayment security.
GAC GAC Debt Management & Capital Financing 1
Which type of municipal bond is backed solely by the issuing government's pledge of its full faith, credit, and taxing power?