LOS h: Explain how the creditworthiness of municipal bonds is assessed, and contrast the analysis of tax-backed debt with the analysis of revenue obligations.

Q1. Which of the following statements regarding the comparison of "general obligation" and "revenue" municipal bonds is FALSE?

A)   Revenue bonds must be evaluated with respect to their covenants such that revenues from the project are not redirected toward other uses within the community.

B)   Revenue bonds are backed by the full faith and credit of the issuing municipality.

C)   General obligation bonds must be evaluated with respect to the issuer's existing debt structure and the ability of the local government to generate the requisite level of taxes to repay the debt.

Q2. Each of the following factors are employed in the assessment of "tax-backed" municipal bonds EXCEPT:

A)   Issuer's debt structure.

B)   Local tax availability.

C)   Credit quality of the collateral.

Q3. Which of the following factors used to assess municipal tax-backed debt analyzes the issuer’s ability to manage general operating funds?

A)   Issuer's debt structure.

B)   Budgetary policy.

C)   Local tax and intergovernmental revenue availability.

Q4. Which of the following securities is analyzed in much the same way as corporate bonds?

A)   Foreign currency debt securities.</< p>

B)   Municipal tax-backed debt.

C)   Municipal revenue bonds.

Q5. When assessing the risk of tax-backed municipal bonds, it is important to analyze all of the following factors EXCEPT:

A)   whether there are sufficient covenants to ensure revenues are not redirected for purposes other than the payment of tax-backed municipal bonds.

B)   the issuer's ability and political discipline to maintain a sound budgetary policy.

C)   evaluating the issuer's socioeconomic environment.

LOS h: Explain how the creditworthiness of municipal bonds is assessed, and contrast the analysis of tax-backed debt with the analysis of revenue obligations. fficeffice" />

Q1. Which of the following statements regarding the comparison of "general obligation" and "revenue" municipal bonds is FALSE?

A)   Revenue bonds must be evaluated with respect to their covenants such that revenues from the project are not redirected toward other uses within the community.

B)   Revenue bonds are backed by the full faith and credit of the issuing municipality.

C)   General obligation bonds must be evaluated with respect to the issuer's existing debt structure and the ability of the local government to generate the requisite level of taxes to repay the debt.

Correct answer is B)

The cash flows (revenue) from the project that the revenue bond funded are used to service the bond.

Q2. Each of the following factors are employed in the assessment of "tax-backed" municipal bonds EXCEPT:

A)   Issuer's debt structure.

B)   Local tax availability.

C)   Credit quality of the collateral.

Correct answer is C)

There is typically no collateral pledged to a general obligation municipal bond.

Q3. Which of the following factors used to assess municipal tax-backed debt analyzes the issuer’s ability to manage general operating funds?

A)   Issuer's debt structure.

B)   Budgetary policy.

C)   Local tax and intergovernmental revenue availability.

Correct answer is B)

The analysis of budgetary policy entails the assessment of the issuer’s ability to manage general operating funds.

Q4. Which of the following securities is analyzed in much the same way as corporate bonds?

A)   Foreign currency debt securities.</< p>

B)   Municipal tax-backed debt.

C)   Municipal revenue bonds.

Correct answer is C)

Revenue bonds are evaluated much like corporate bonds, because the primary concern is whether or not enough cash flow will be generated to satisfy the debt obligations.

Q5. When assessing the risk of tax-backed municipal bonds, it is important to analyze all of the following factors EXCEPT:

A)   whether there are sufficient covenants to ensure revenues are not redirected for purposes other than the payment of tax-backed municipal bonds.

B)   the issuer's ability and political discipline to maintain a sound budgetary policy.

C)   evaluating the issuer's socioeconomic environment.

Correct answer is A)

When evaluating tax-backed debt the analyst should assess the issuer’s debt structure, budgetary policy, local tax and intergovernmental revenue availability, and the issuer’s socioeconomic environment.

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