Chapter 12 Part 8

Question 1

Municipal bonds arc classified into two major categories

Answer 1

general obligation bonds (GOs) and revenue bonds

Question 2

General obligation bonds are secured by the

Answer 2

full faith and credit of the issuer, which means the municipality’s ability to collect taxes. Only entities that have the right to impose and collect taxes may issue general obligation bonds

Question 3

Debt service is the

Answer 3

interest and principal payments due on a bond. Local governments, such as cities and counties, usually rely on property taxes to pay for their expenditures and also to pay the debt service on their bond issues

Question 4

Property taxes are also known as

Answer 4

ad valorem taxes. These taxes are based on the value of the real estate that the taxpayer owns

Question 5

States generally do not levy

Answer 5

property taxes. They usually use income, sales, and other taxes to back their bond issues

Question 6

limited-tax general obligation bonds

Answer 6

Certain governmental units, such as school districts, have a legal limit on the amount of taxes they may impose

Question 7

revenue bonds are backed by

Answer 7

the fees that people pay to use a specific public facility such as a toll bridge. For example, Lemon County issues revenue bonds to pay for a new irrigation system. The fees paid by the farmers who use the system to irrigate their fields are used to pay the interest on the bonds and to repay their face value when they mature. If the system’s revenues are not enough to service the debt, Lemon County does not have an obligation to make up the difference.

Question 8

Revenue bonds are commonly used to finance the following types of projects

Answer 8

Airports, Housing, Roads, Bridges, Hospitals, Sewers and water systems, Colleges and universities, Power plants, Sports arenas and convention centers

Question 9

Industrial development revenue bonds are

Answer 9

a special type of revenue bond. They are issued by a municipality but backed by a private corporation. The money raised from the bond issue is generally used to pay for the construction of a building or plant that the municipality leases to the corporation. Since the municipality does not back the bonds, they are only as good as the corporation behind them

Question 10

Bonds are long-term

Answer 10

obligations (generally a year or more).

Question 11

When state and local governments need to raise money on a short-term basis, they issue various types of

Answer 11

notes. Municipal notes generally mature in one year or less

Question 12

Bond anticipation notes (BANs) are issued to

Answer 12

obtain temporary financing when the municipality expects to issue long-term bonds

Question 13

Tax anticipation notes (TANs) are used

Answer 13

when the municipality expects to repay the notes through the collection of taxes

Question 14

Revenue anticipation notes (rANs) are used

Answer 14

when the issuer expects funds from some other source than its own taxes, such as revenue from the state or federal government

Question 15

Debt with a maturity of more than one year is orten referred to as

Answer 15

as funded debt

Question 16

Money-market securities are

Answer 16

short-term debt securities (one year or less). There arc a large variety of securities that trade in the 1noney 1narket. Issuers include the lJ.S. government, government agencies, banks, and corporations. There are also a wide variety or participants in the money market including the Federal Reserve Board, banks, securities dealers, and corporations

Question 17

Money-market transactions provide an avenue for

Answer 17

both acquiring money (borrowing) and investing (lending) excess funds for short periods. Typically, the period ranges from overnight to a few months, but may be as long as one year

Question 18

Examples of money-market securities and related instruments are

Answer 18

Commercial Paper; Bankers’ Acceptances; Negotiable Certificates of Deposit; Federal Funds; Money-Market Funds; repurchase Agreements (Hepos)

Question 19

money market instruments are classified as a separate asset class

Answer 19

cash equivalents. Cash equivalents are investments of such high quality and safety that they are considered as good as cash. They are considered a separate asset class from debt instruments because their returns arc relatively uncorrelated with bonds

Question 20

When corporations need long-term financing, they issue bonds. When they are in need of short-term financing, they issue

Answer 20

commercial paper