Chapter 1 Practice Question Answers
- 1. Answer: B. Ad valorem property and real estate taxes are calculated as a percentage of a property’s assessed value, which itself is a percentage of a property’s market value. Ad valorem tax rates are expressed in mills, which are one thousandth (0.1%) of a dollar (expressed as 0.001 in decimal form). Thus, $300,000 x 0.004 = $1,200.
- 2. Answer: A. Only entities that have the right to levy and collect taxes may issue general obligation bonds. An ad valorem tax (Latin for “according to value”) is a tax based on the price or value of a product. Income taxes, sales taxes, and property taxes are all ad valorem taxes. The Philadelphia Water Department would issue a revenue bond, as this entity does not have the right to levy and collect taxes.
- 3. Answer: C. General obligation bonds are backed by the full faith and credit of the issuer, which means that the issuer must use its full taxing and borrowing authority to ensure the timely payment of principal and interest. Double-barreled bonds have characteristics of both revenue and general obligation bonds. The primary source is the revenue from the project being financed. However, tax dollars may be summoned if project revenue is insufficient. Ultimately, a double-barreled bond is guaranteed by the full faith and credit of the issuing entity.
- 4. Answer: B. Local government investment pools are trusts that invest the money held by participating government entities in securities allowed under the state’s laws regarding government investments.
- 5. Answer: B. A bond that starts as a zero coupon bond and converts to a coupon bond at a specified time is called a convertible coupon bond. A capital appreciation bond (CAB) is another special type of zero coupon bond, one whose discount is calculated using compound interest. The CAB’s purchase price at issuance is counted toward the issuer’s statutory debt limit. This puts less pressure on the issuer