ACCT 4421 Exam 2 UPDATED ACTUAL
Exam Questions and CORRECT Answers
Arbitrage - CORRECT ANSWER - The concurrent purchase and sale of the same or an
equivalent security in order to profit from differences in interest rates. Generally, as it relates to
state and local governments, the issuance of debt at relatively low, tax-exempt rates of interest
and the investment of the proceeds in taxable securities yielding a higher rate of return
Bond Refunding - CORRECT ANSWER - The issuance of new bonds to replace bonds
already outstanding, usually with the intent of reducing debt service costs
Bonds - CORRECT ANSWER - A written promise to pay a specified sum of money (its
face value) at one or more specified times in the future along with periodic interest. Bonds are a
form of notes payable but are characterized by longer periods of maturity and more formal
documentation
Call Prices - CORRECT ANSWER - A predetermined price at which the issuer of bonds
may redeem the bonds irrespective of the current market price
Capital Projects Funds - CORRECT ANSWER - A fund to account for financial resources
set aside for the acquisition or construction of major capital facilities
Coupon Rate - CORRECT ANSWER - The stated interest rate on the face of a bond; The
bond's nominal interest rate
Debt Service Funds - CORRECT ANSWER - A fund to account for financial resources set
aside for the payment of interest and principal on long-term debt
Economic Cost - CORRECT ANSWER - The full cost of goods or services, as opposed to
that which might be recognized for financial accounting
, In-Substance Defeasance - CORRECT ANSWER - An advance refunding (Retirement of
bonds) in which the government places sufficient resources in a trust account to cover all
required principal and interest payments on the defeased debt. Although the government is not
legally released from being the primary obligor on the refunded bonds, the possibility of it
having to make additional payments is considered remote.
Issue Costs - CORRECT ANSWER - Costs incurred to issue bonds, such as amounts paid
to underwriters, attorneys, accountants, and printers
Modified Accrual Basis - CORRECT ANSWER - The accrual basis of accounting adapted
to the governmental fund-type measurement focus. Revenues are recognized in the period in
which they become available and measurable. Some expenditures are recognized on a full
accrual basis; others on a cash basis
Refinance - CORRECT ANSWER - To replace existing debt with new debt, generally to
take advantage of lower interest rates, or to shorten or lengthen the debt payout period
When the bonds are issued at a premium, the ______________________ fund can transfer
resources to the ____________________ fund. - CORRECT ANSWER - When the bonds
are issued at a premium, the CAPITAL PROJECTS fund can transfer resources to the DEBT
SERVICE fund.
1) Reduce the scale of a project
2) Make up the deficiency by other means - CORRECT ANSWER - What are the two
choices a government has when bonds are issued at a discount?
Collateralized debt obligation - CORRECT ANSWER - An asset-backed security whose
value and payments are derived from a portfolio of fixed-income underlying assets; such as a
pool of subprime mortgages
Deferred Maintenance Costs - CORRECT ANSWER - The costs that an entity avoided in
a current year or in past years by failing to perform required routine maintenance and repairs, but
that will have to be incurred in the future
Exam Questions and CORRECT Answers
Arbitrage - CORRECT ANSWER - The concurrent purchase and sale of the same or an
equivalent security in order to profit from differences in interest rates. Generally, as it relates to
state and local governments, the issuance of debt at relatively low, tax-exempt rates of interest
and the investment of the proceeds in taxable securities yielding a higher rate of return
Bond Refunding - CORRECT ANSWER - The issuance of new bonds to replace bonds
already outstanding, usually with the intent of reducing debt service costs
Bonds - CORRECT ANSWER - A written promise to pay a specified sum of money (its
face value) at one or more specified times in the future along with periodic interest. Bonds are a
form of notes payable but are characterized by longer periods of maturity and more formal
documentation
Call Prices - CORRECT ANSWER - A predetermined price at which the issuer of bonds
may redeem the bonds irrespective of the current market price
Capital Projects Funds - CORRECT ANSWER - A fund to account for financial resources
set aside for the acquisition or construction of major capital facilities
Coupon Rate - CORRECT ANSWER - The stated interest rate on the face of a bond; The
bond's nominal interest rate
Debt Service Funds - CORRECT ANSWER - A fund to account for financial resources set
aside for the payment of interest and principal on long-term debt
Economic Cost - CORRECT ANSWER - The full cost of goods or services, as opposed to
that which might be recognized for financial accounting
, In-Substance Defeasance - CORRECT ANSWER - An advance refunding (Retirement of
bonds) in which the government places sufficient resources in a trust account to cover all
required principal and interest payments on the defeased debt. Although the government is not
legally released from being the primary obligor on the refunded bonds, the possibility of it
having to make additional payments is considered remote.
Issue Costs - CORRECT ANSWER - Costs incurred to issue bonds, such as amounts paid
to underwriters, attorneys, accountants, and printers
Modified Accrual Basis - CORRECT ANSWER - The accrual basis of accounting adapted
to the governmental fund-type measurement focus. Revenues are recognized in the period in
which they become available and measurable. Some expenditures are recognized on a full
accrual basis; others on a cash basis
Refinance - CORRECT ANSWER - To replace existing debt with new debt, generally to
take advantage of lower interest rates, or to shorten or lengthen the debt payout period
When the bonds are issued at a premium, the ______________________ fund can transfer
resources to the ____________________ fund. - CORRECT ANSWER - When the bonds
are issued at a premium, the CAPITAL PROJECTS fund can transfer resources to the DEBT
SERVICE fund.
1) Reduce the scale of a project
2) Make up the deficiency by other means - CORRECT ANSWER - What are the two
choices a government has when bonds are issued at a discount?
Collateralized debt obligation - CORRECT ANSWER - An asset-backed security whose
value and payments are derived from a portfolio of fixed-income underlying assets; such as a
pool of subprime mortgages
Deferred Maintenance Costs - CORRECT ANSWER - The costs that an entity avoided in
a current year or in past years by failing to perform required routine maintenance and repairs, but
that will have to be incurred in the future
