Deck 15: Debt Administration

Question 1

Notes are appropriately used to:

A) permanently finance capital projects.
B) manage cash flow problems.
C) finance the lease of equipment.
D) raise money to reduce taxes.

Answer 1

manage cash flow problems

Question 2

Municipal bonds with a serial component are sold on the basis of coupon bids. Bids may be evaluated according to either net interest cost or true interest cost. Evaluations should use true interest cost because:

A) it is easier to compute.
B) net interest cost leads to biased choices when bond issues are large.
C) true interest cost recognizes the time value of money.
D) None of the above.

Answer 2

True interest cost recognizes the time value of money

Question 3

A bond with which of the following bond ratings would likely bear the LOWEST
interest rate?

A) Ba
B) A
C) Aa
D) Aaa

Answer 3

Aaa

Question 4

A municipal bond issue has a serial component when:

A) holders of the bonds must report the serial numbers of the bonds to the Internal Revenue Service also called registered bonds).
B) tax revenues are pledged for repayment.
C) the issue has bonds of varying terms to maturity.
D) only a single coupon rate will be paiD)

Question 5

Mr. Clark W. Griswold owns a municipal bond with a par value of $1000. The
coupon rate is 6% and the current market interest rate on similar investments is 4%.
What is the semiannual interest payment Mr. Clark W. Griswold receives from this
bond?

A) $60
B) $45
C) $30
D) $15

Question 6

In March 1982, Moody's lowered its rating for City of Indianapolis debt from Aaa to Aa. Which of the following would result from that change?

A) The interest that Indianapolis has to pay on debt issued before the rating change will increase.
B) The interest rate that Indianapolis can expect to pay on new debt issues will rise.
C) The interest paid by Indianapolis will no longer be excluded from federal income taxes.
D) The new speculative rating means that banks must clear their investment portfolios of this debt.

Question 7

Municipal debt ratings:

A) are prepared by state audit agencies.
B) are opinions prepared by private firms about the likelihood that municipal borrowers will repay debt principal and pay interest when due.
C) estimate how well cities have responded to citizen demand for government services.
D) are not used for serial bonds.

Question 8

Solsberry has sold a twenty-year serial bond issue with a face value of $15 million. The average maturity of the issue is fifteen years. Total interest to be paid on the bonds, payable semi-annually, equals $12,375 thousand. What is the net interest cost NIC) of the issue?

A) The NIC cannot be computed from the data provided here.
B) 5.5%
C) 4.125%
D) 8.25%

Question 9

Why are state and local governments unable to carry large levels of debt?

A) They are constrained by their economic capacity to service their debt.
B) They cannot levy income taxes.
C) They all have upper limit restrictions on the rate at which they can tax.
D) Federal legislation prohibits it, because federal funds will ultimately have to finance a state or municipal bail out.

Question 10

A city has issued 25-year general obligation bonds with a coupon rate of 8 percent. If the market rate currently available on comparable bonds is 10 percent, what has happened to the market value of those bonds?

A) The value is higher than when issueD)
B) The value is lower than when issueD)
C) It is impossible to tell, because the initial bond value is not given.
D) It is impossible to tell, because the coupon structure is not given.

Question 11

A municipal bond underwriter performs what function?

A) Purchases bonds from the municipal issuer for sale to investors.
B) Evaluates projects proposed for city expenditures.
C) Guarantees that municipal borrowers make principal or interest payments on schedule.
D) None of the above.

Question 12

What are the two main components of a normal debt service payment?

A) interest and coupon
B) interest and advertising
C) advertising and principal
D) interest and principal