Chapter 3 Practice Question Answers
1. Answer: C. The feasibility study, protective covenants, flow of funds, and the debt service coverage ratio will all be important factors in analyzing a revenue bond. The net overall debt per capita is an important factor when analyzing a GO bond.
2. Answer: B. The rate covenant requires an issuer to set rates or fees at levels sufficient to generate revenue at some designated threshold. This threshold should be sufficient to cover the project’s operating expenses and debt service, plus a reserve cushion.
3. Answer: B. The bond indenture is the legal document that specifies the scope and features of the revenue bond and holds the issuer to its terms. For a revenue bond, the bond indenture will stipulate whether or not the issuer may sell additional bonds that share equal claims to the issuer’s pledged revenue. An open-end indenture allows them; a closed-end indenture does not. With an open-end indenture, an additional bonds covenant is attached, requiring the issuer to ensure that its expected revenue stream from the existing bond is sufficient to cover both existing and proposed debt service. Revenue bonds have protective covenants; general obligation bonds do not.
4. Answer: D. The Governmental Accounting Standards Board requires that all governmental entities prepare a Comprehensive Annual Financial Report (CAFR) to give a sense of the government’s finances and how they are managed.
The financial section of the CAFR contains all the financial statements, including the statement of activities. It also includes the MD&A, which is usually toward the beginning of the financial section, as well as the independent auditor’s report, which is the first report in the financial section. Information about financial trends can be found in the statistical section of the CAFR.
5. Answer: D. Total pension liability refers to the total amount owed to employees in the future for a defined benefit plan. The