BUDGETING EXAM III QUESTIONS AND ANSWERS | BUDGETING EXAM 3 STUDY
GUIDE & PRACTICE TEST 2026/2027
What are the three types of capital investment? - ANS ✔✔-Physical Assets (Ex: office buildings, heavy
equipment)
-Public Facilities (Ex: roads and water systems)
-Intangibles (Ex: education and research) (pg. 452)
What are two criteria that distinguish operating and capital expenses? - ANS ✔✔-Size of the expenditure
(Govt's budget determines this)
-Useful life of the asset (pg. 354)
What is the difference between capital budget and capital improvement plan? - ANS ✔✔A capital budget
only applies to one fiscal year and focus on current-year implications.
Capital improvement plans are multi-year (typically five years) (pg. 456). Also, the capital improvement
plan doesn't always include funding.
What are the priorities for capital improvement plans? - ANS ✔✔1) Replacing deteriorated facilities
(sometimes involves log rolling)
2) Meeting population growth requirements
3) Improving quality of services
Why do state and local governments formally segregate capital and operating expenditures? - ANS
✔✔State and local governments can rarely afford to finance large capital items from regular revenues,
and typically have to borrow money that does not count in determining the budget balance (pg. 464).
How are capital investments handled in the US Federal Budget? - ANS ✔✔They are paid for when they
are incurred. The federal government does not have a capital budget, but it should. It does not have one
because it's too big and varies too much.
The purchase of a long-lasting facility/asset is named...? - ANS ✔✔A capital investment (pg. 452).
What is the first step in public capital investment programs? - ANS ✔✔The first step is to make an
inventory of existing physical or infrastructure facilities and to assess the services provided (all relevant
info) (pg. 459).
What percentage of capital investment portion of the US capital investment budget goes towards
defense acquisition? - ANS ✔✔Approximately 50%. The other half goes towards direct federal physical
capital expenditures (17%) and grants to state and local governments for capital spending (33%) (pg.
464).
What percentage of federal physical capital outlays are grants to state and local governments? - ANS
✔✔Approximately 33% (pg. 465).
Externalities: - ANS ✔✔Indirect costs as well as benefits that affect parties other than the ones directly
involved. (Ex: Negative-pollution). Affected parties are stakeholders
, Shadow Pricing: - ANS ✔✔Trying to determine the prices or value of programs.
It's hard to estimate the dollar value of saving a life, so cost-effectiveness (estimate) is preferable to cost-
benefit analysis. Shadow pricing is an estimate of what the project will generate in benefits.
True or False: Operating and maintenance costs of a new facility or project are lower in the early years of
operation. - ANS ✔✔TRUE. It is more expensive later as it needs to be fixed. The heavier costs fall
outside of the range of normal five-year capital planning cycles (pg. 462).
True or False: Combined infrastructure deficit in the US is over $2.2 trillion. - ANS ✔✔TRUE. A study by
the American Society of Civil Engineers estimated that the combine public infrastructure debt deficit in
facilities such as water systems, schools, airport, and highways was $2.2 trillion in 2000 (pg. 480).
True or False: Capital budget decisions are less political than other decisions. - ANS ✔✔False. At least as
political or more (Dr. Graham).
Variation called sub-leasing of existing facility? - ANS ✔✔Sometimes jurisdictions will encourage a
private investor to build a public facility, and then they rent it, rather than paying for it as a capital
expenditure.
What are the two categories of long-term bonds? - ANS ✔✔-General obligation bonds: guaranteed
bonds backed by the full faith and credit of the issuing government.
-Revenue bonds: non-guaranteed bonds that are backed by specifically identified revenue sources and
do not have the legal backing of a larger governmental entity with taxing power (pg. 492).
_____________ are debt instruments that instead of paying the purchaser interest payments on the
bond, allow the investor to subtract the equivalent of interest from the investor's federal income tax
liability. - ANS ✔✔Tax credit bonds. The concept of a tax credit bond is to deliver more federal support to
infrastructure programs, because a tax credit is worth more to an investor (pg. 501).
Bonds issued in smaller denominations: - ANS ✔✔Mini-bonds. It becomes uneconomical to sell and
track bonds in small denominations, but popular for financing smaller projects that interest local
residents. Combination of large and small denominations attract a variety of investors (more
participation) (pg. 503).
Underwriter: - ANS ✔✔Underwriters arrange the actual sale of bonds to financial institutions. Most
issuers rely on an underwriter, as they have client lists, access to a wide range of investors, and are
typically able to sell a borrower's bond issue sooner than the borrower (pg. 508).
Zero coupon bonds: - ANS ✔✔Since the coupon rate is the interest rate that the bond will pay, a zero
coupon bond pays out no interest until maturity, when both the principle and the interest are paid at
once. These bonds typically call for the issuer to set aside funds with a trustee, on a regular basis,
sufficient to pay off at the time of maturity (pg. 511).
The three major bond rating organizations: - ANS ✔✔-Fitch Investors Service L.P.
-Moody's Investor Service
-Standard & Poor's
GUIDE & PRACTICE TEST 2026/2027
What are the three types of capital investment? - ANS ✔✔-Physical Assets (Ex: office buildings, heavy
equipment)
-Public Facilities (Ex: roads and water systems)
-Intangibles (Ex: education and research) (pg. 452)
What are two criteria that distinguish operating and capital expenses? - ANS ✔✔-Size of the expenditure
(Govt's budget determines this)
-Useful life of the asset (pg. 354)
What is the difference between capital budget and capital improvement plan? - ANS ✔✔A capital budget
only applies to one fiscal year and focus on current-year implications.
Capital improvement plans are multi-year (typically five years) (pg. 456). Also, the capital improvement
plan doesn't always include funding.
What are the priorities for capital improvement plans? - ANS ✔✔1) Replacing deteriorated facilities
(sometimes involves log rolling)
2) Meeting population growth requirements
3) Improving quality of services
Why do state and local governments formally segregate capital and operating expenditures? - ANS
✔✔State and local governments can rarely afford to finance large capital items from regular revenues,
and typically have to borrow money that does not count in determining the budget balance (pg. 464).
How are capital investments handled in the US Federal Budget? - ANS ✔✔They are paid for when they
are incurred. The federal government does not have a capital budget, but it should. It does not have one
because it's too big and varies too much.
The purchase of a long-lasting facility/asset is named...? - ANS ✔✔A capital investment (pg. 452).
What is the first step in public capital investment programs? - ANS ✔✔The first step is to make an
inventory of existing physical or infrastructure facilities and to assess the services provided (all relevant
info) (pg. 459).
What percentage of capital investment portion of the US capital investment budget goes towards
defense acquisition? - ANS ✔✔Approximately 50%. The other half goes towards direct federal physical
capital expenditures (17%) and grants to state and local governments for capital spending (33%) (pg.
464).
What percentage of federal physical capital outlays are grants to state and local governments? - ANS
✔✔Approximately 33% (pg. 465).
Externalities: - ANS ✔✔Indirect costs as well as benefits that affect parties other than the ones directly
involved. (Ex: Negative-pollution). Affected parties are stakeholders
, Shadow Pricing: - ANS ✔✔Trying to determine the prices or value of programs.
It's hard to estimate the dollar value of saving a life, so cost-effectiveness (estimate) is preferable to cost-
benefit analysis. Shadow pricing is an estimate of what the project will generate in benefits.
True or False: Operating and maintenance costs of a new facility or project are lower in the early years of
operation. - ANS ✔✔TRUE. It is more expensive later as it needs to be fixed. The heavier costs fall
outside of the range of normal five-year capital planning cycles (pg. 462).
True or False: Combined infrastructure deficit in the US is over $2.2 trillion. - ANS ✔✔TRUE. A study by
the American Society of Civil Engineers estimated that the combine public infrastructure debt deficit in
facilities such as water systems, schools, airport, and highways was $2.2 trillion in 2000 (pg. 480).
True or False: Capital budget decisions are less political than other decisions. - ANS ✔✔False. At least as
political or more (Dr. Graham).
Variation called sub-leasing of existing facility? - ANS ✔✔Sometimes jurisdictions will encourage a
private investor to build a public facility, and then they rent it, rather than paying for it as a capital
expenditure.
What are the two categories of long-term bonds? - ANS ✔✔-General obligation bonds: guaranteed
bonds backed by the full faith and credit of the issuing government.
-Revenue bonds: non-guaranteed bonds that are backed by specifically identified revenue sources and
do not have the legal backing of a larger governmental entity with taxing power (pg. 492).
_____________ are debt instruments that instead of paying the purchaser interest payments on the
bond, allow the investor to subtract the equivalent of interest from the investor's federal income tax
liability. - ANS ✔✔Tax credit bonds. The concept of a tax credit bond is to deliver more federal support to
infrastructure programs, because a tax credit is worth more to an investor (pg. 501).
Bonds issued in smaller denominations: - ANS ✔✔Mini-bonds. It becomes uneconomical to sell and
track bonds in small denominations, but popular for financing smaller projects that interest local
residents. Combination of large and small denominations attract a variety of investors (more
participation) (pg. 503).
Underwriter: - ANS ✔✔Underwriters arrange the actual sale of bonds to financial institutions. Most
issuers rely on an underwriter, as they have client lists, access to a wide range of investors, and are
typically able to sell a borrower's bond issue sooner than the borrower (pg. 508).
Zero coupon bonds: - ANS ✔✔Since the coupon rate is the interest rate that the bond will pay, a zero
coupon bond pays out no interest until maturity, when both the principle and the interest are paid at
once. These bonds typically call for the issuer to set aside funds with a trustee, on a regular basis,
sufficient to pay off at the time of maturity (pg. 511).
The three major bond rating organizations: - ANS ✔✔-Fitch Investors Service L.P.
-Moody's Investor Service
-Standard & Poor's
