Exercise
Pick the best choice for each question.
1.Which of the following are true of low-to-high advance refundings?
I.The refunding bond is issued at a higher interest rate than the refunded bond.
II.The refunded bond has a higher interest rate than the refunding bond.
III.They can be used to free the issuer from restrictions in the bond indenture of the refunded bond.
IV.They are a way for a municipality to save money on interest payments.
A.II and III
B.I and IV
C.I and III
D.II and IV
2.A bond is said to be defeased when:
A.Its proceeds are invested in an escrow account.
B.It is canceled out by funds in an escrow account.
C.It has been added to the balance sheet as an asset.
D.It has been placed under certain restrictions by a bond indenture.
3.Which of the following is a true statement regarding the difference between an ETM refunding and a pre-refunding?
A.An ETM refunding is generally used to refund a bond at its first call date, while a pre-refunding is used to free the issuer from debt ceiling limits.
B.A pre-refunding will always take place earlier in the life of a refunded bond than an ETM refunding.
C.Funds from an ETM refunding are supplemented by other revenue, while funds from pre-refunding bonds are not.
D.A pre-refunding bond is generally used to save money on interest payments, while an ETM refunding is often used to lift restrictive covenants from the issuer.
4.When is advance refunding most likely to occur?
A.When interest rates have declined and the bond issue has not reached its call date
B.When interest rates have declined and the bond is past its call date
C.When interest rates have risen and the bond issue has not reached its call date
D.When interest rates have risen and the bond issued is past its call date
5.Which of the following is not an advantage of advance refunding?
A.For issuers, it allows them to lock in lower interest rate