CPFO Debt Exam Questions with
Complete Solutions
Bond Trustee - Answer- Acts as a fiduciary agent for the benefit of the bondholders in
enforcing the terms of the trust indenture. May transmit payments from the issuer to the
bondholders; disseminate on going disclosures; disperse bond proceeds; and place
investment of bond proceeds based on issuer instruction.
Paying Agent/Registrar - Answer- Receives funds from the issuer and makes payment
to bondholders; maintains records of bond ownership.
Bond Syndicate - Answer- A group formed by bond underwriting firms or issuers to
purchase bonds and redistribute them to final investors.
Used when the bond issue is too large or too specialized for one underwriter firm to
handle exclusively.
Securities Depository - Answer- Maintains a record of ownership for bonds issued
without physical certificate of ownership: "book entry" securities.
Gross Spread - Answer- How bond underwriters are compensated. Expressed as a
dollar per $1000 bond figure.
Made up of: takedown, management fee, underwriting risk, and expenses
Takedown (component of gross spread) - Answer- The sales commission,
compensation for selling the bonds.
Management Fee (component of gross spread) - Answer- The fee paid for financial
advice, document preparation, and managing syndicate activities.
Underwriting Risk (component of gross spread) - Answer- Compensation for the risk
involved in committing to buy and place bonds; rarely included currently
Tax Certificate - Answer- A document that provides information about a bond issue in
support of bond counsel's opinion that interest is exempt from federal taxes and
identifies the IRS arbitrage restrictions that apply to the bonds.
True Interest Cost - Answer- The rate that, when used to discount total debt service
payments, results in the bond purchase price.
Net Interest Cost - Answer- The average interest rate on a bond issue
, Private Placement - Answer- The sale of bonds buy an issuer ( facilitated by an
underwriter)directly to a single investor or a small number of sophisticated investors
without a public offering; used because of a faster sales process, or if issue was not
rated, Limited disclosure is available or a unique feature or problem must be discussion
Sizing the Bond Issue - Answer- Determining the amount of bonds to be issued
Takes into account the cost of the project, cost associated with issuance, and interest
earnings on invested proceeds
Par Value - Answer- The face value of the bond, a.k.a. par amount
Original Issue Premium - Answer- When an issuer receives a higher amount of
proceeds than the principal it repays and pays higher coupon interest rates in the
market value for comparable securities.
Original Issue Discount - Answer- When an issuer receives fewer proceeds than the par
amount, but pays coupon interest on the bonds that are lower than the market rate.
Credit Enhancement - Answer- Bond insurance or letters of credit that provide added
assurance to investors the principal and interest payments will be made on time and in
full
Bonds sold with credit enhancement carry the rating of the credit provider
Bond Insurance - Answer- A type of credit enhancement purchased for the term of the
bonds; premium is based on the amount of debt service expected to be paid, and is
generally less costly than letters of credit.
Letter of Credit - Answer- A type of credit enhancement typically purchased for a term
shorter than the life of the bonds; may have to be renewed periodically at the discretion
of the letter of credit bank; generally more expensive than bond insurance
Serial Bonds - Answer- Bonds in which a specific principal amount of bonds is retired
each year throughout the life of the bonds
Term Bonds - Answer- Bonds in which a large part, or all, of a bond issue comes due in
a single maturity
Capital Appreciation Bond - Answer- A bond that is issued at par where interest accrues
at a stated rate until the final maturity when it is paid as a lump sum
Level Principle Debt Service Schedule - Answer- A debt payment schedule where
principal is retired evenly over the life of the bonds; therefore total debt service
decreases as interest decreases
Complete Solutions
Bond Trustee - Answer- Acts as a fiduciary agent for the benefit of the bondholders in
enforcing the terms of the trust indenture. May transmit payments from the issuer to the
bondholders; disseminate on going disclosures; disperse bond proceeds; and place
investment of bond proceeds based on issuer instruction.
Paying Agent/Registrar - Answer- Receives funds from the issuer and makes payment
to bondholders; maintains records of bond ownership.
Bond Syndicate - Answer- A group formed by bond underwriting firms or issuers to
purchase bonds and redistribute them to final investors.
Used when the bond issue is too large or too specialized for one underwriter firm to
handle exclusively.
Securities Depository - Answer- Maintains a record of ownership for bonds issued
without physical certificate of ownership: "book entry" securities.
Gross Spread - Answer- How bond underwriters are compensated. Expressed as a
dollar per $1000 bond figure.
Made up of: takedown, management fee, underwriting risk, and expenses
Takedown (component of gross spread) - Answer- The sales commission,
compensation for selling the bonds.
Management Fee (component of gross spread) - Answer- The fee paid for financial
advice, document preparation, and managing syndicate activities.
Underwriting Risk (component of gross spread) - Answer- Compensation for the risk
involved in committing to buy and place bonds; rarely included currently
Tax Certificate - Answer- A document that provides information about a bond issue in
support of bond counsel's opinion that interest is exempt from federal taxes and
identifies the IRS arbitrage restrictions that apply to the bonds.
True Interest Cost - Answer- The rate that, when used to discount total debt service
payments, results in the bond purchase price.
Net Interest Cost - Answer- The average interest rate on a bond issue
, Private Placement - Answer- The sale of bonds buy an issuer ( facilitated by an
underwriter)directly to a single investor or a small number of sophisticated investors
without a public offering; used because of a faster sales process, or if issue was not
rated, Limited disclosure is available or a unique feature or problem must be discussion
Sizing the Bond Issue - Answer- Determining the amount of bonds to be issued
Takes into account the cost of the project, cost associated with issuance, and interest
earnings on invested proceeds
Par Value - Answer- The face value of the bond, a.k.a. par amount
Original Issue Premium - Answer- When an issuer receives a higher amount of
proceeds than the principal it repays and pays higher coupon interest rates in the
market value for comparable securities.
Original Issue Discount - Answer- When an issuer receives fewer proceeds than the par
amount, but pays coupon interest on the bonds that are lower than the market rate.
Credit Enhancement - Answer- Bond insurance or letters of credit that provide added
assurance to investors the principal and interest payments will be made on time and in
full
Bonds sold with credit enhancement carry the rating of the credit provider
Bond Insurance - Answer- A type of credit enhancement purchased for the term of the
bonds; premium is based on the amount of debt service expected to be paid, and is
generally less costly than letters of credit.
Letter of Credit - Answer- A type of credit enhancement typically purchased for a term
shorter than the life of the bonds; may have to be renewed periodically at the discretion
of the letter of credit bank; generally more expensive than bond insurance
Serial Bonds - Answer- Bonds in which a specific principal amount of bonds is retired
each year throughout the life of the bonds
Term Bonds - Answer- Bonds in which a large part, or all, of a bond issue comes due in
a single maturity
Capital Appreciation Bond - Answer- A bond that is issued at par where interest accrues
at a stated rate until the final maturity when it is paid as a lump sum
Level Principle Debt Service Schedule - Answer- A debt payment schedule where
principal is retired evenly over the life of the bonds; therefore total debt service
decreases as interest decreases
