CPFO Debt - Capital Financing UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Name a principle consideration in selecting a funding source for capital improvements. 1 of 3 -
CORRECT ANSWER - Equity - beneficiaries of a project should pay for it
Name a principle consideration in selecting a funding source for capital improvements. 2 of 3 -
CORRECT ANSWER - Effectiveness - obtain sufficient capital to fund the project
Name a principle consideration in selecting a funding source for capital improvements. 3 of 3 -
CORRECT ANSWER - Efficiency - relative costs
Name a revenue source of Tax Increment Financing bonds - CORRECT ANSWER - The
increment revenues generated by development projects
Why do the holders of zero-coupon bonds have reduced reinvestment risk? - CORRECT
ANSWER - They don't get periodic interest/coupon payments that need to be reinvested
What is tax exempt commercial paper? - CORRECT ANSWER - A very flexible short
term debt, like BANs RANs, TANs, GANs
What are reverse repurchase agreements? - CORRECT ANSWER - The purchase
securities with the agreement to sell them at a higher price at a specific future date.
What is balance sheet risk in variable debt? - CORRECT ANSWER - Risk that the fund
repaying the debt doesn't have the available cash to repay the debt when due.
What is interest rate risk in variable rate debt? - CORRECT ANSWER - Risk that the
variable interest rate will rise, increasing the overall financing cost.
, What is remarketing risk in variable rate debt? - CORRECT ANSWER - The need to have
contingency plans in case you cannot remarket your bonds.
What is rollover risk in variable rate debt? - CORRECT ANSWER - Alternative fund
source to cover the shortfalls.
What are Variable Rate Demand Obligations (VRDO) in variable rate debt? - CORRECT
ANSWER - Bonds that allow investors to put the bond back to the issuer, can make what
was intended to be a long term debt, now becomes short term.
How are rate set in an Auction Rate Securities (ARS)? - CORRECT ANSWER - In a
Dutch Auction.
What is the goal of derivatives? - CORRECT ANSWER - The goal is to manage exposure
to interest rate risk.
What is an example of a derivative? - CORRECT ANSWER - Swapping a floating rate
obligation for a fixed rate obligation
How can a govt reduce risk, reduce interest rate? - CORRECT ANSWER - Increase credit
rating, bond insurance, letter of credit, surety bond
What credit rate ratings are considered investment grade bonds? - CORRECT ANSWER -
Credit ratings of AAA to BBB-
What credit rate ratings are considered junk bond? - CORRECT ANSWER - Credit ratings
below BBB-
What are the limitations of the debt service reserve? 1 of 3 - CORRECT ANSWER - May
not exceed 10% of the stated principal amount of the issue.
ACTUAL Exam Questions and CORRECT
Answers
Name a principle consideration in selecting a funding source for capital improvements. 1 of 3 -
CORRECT ANSWER - Equity - beneficiaries of a project should pay for it
Name a principle consideration in selecting a funding source for capital improvements. 2 of 3 -
CORRECT ANSWER - Effectiveness - obtain sufficient capital to fund the project
Name a principle consideration in selecting a funding source for capital improvements. 3 of 3 -
CORRECT ANSWER - Efficiency - relative costs
Name a revenue source of Tax Increment Financing bonds - CORRECT ANSWER - The
increment revenues generated by development projects
Why do the holders of zero-coupon bonds have reduced reinvestment risk? - CORRECT
ANSWER - They don't get periodic interest/coupon payments that need to be reinvested
What is tax exempt commercial paper? - CORRECT ANSWER - A very flexible short
term debt, like BANs RANs, TANs, GANs
What are reverse repurchase agreements? - CORRECT ANSWER - The purchase
securities with the agreement to sell them at a higher price at a specific future date.
What is balance sheet risk in variable debt? - CORRECT ANSWER - Risk that the fund
repaying the debt doesn't have the available cash to repay the debt when due.
What is interest rate risk in variable rate debt? - CORRECT ANSWER - Risk that the
variable interest rate will rise, increasing the overall financing cost.
, What is remarketing risk in variable rate debt? - CORRECT ANSWER - The need to have
contingency plans in case you cannot remarket your bonds.
What is rollover risk in variable rate debt? - CORRECT ANSWER - Alternative fund
source to cover the shortfalls.
What are Variable Rate Demand Obligations (VRDO) in variable rate debt? - CORRECT
ANSWER - Bonds that allow investors to put the bond back to the issuer, can make what
was intended to be a long term debt, now becomes short term.
How are rate set in an Auction Rate Securities (ARS)? - CORRECT ANSWER - In a
Dutch Auction.
What is the goal of derivatives? - CORRECT ANSWER - The goal is to manage exposure
to interest rate risk.
What is an example of a derivative? - CORRECT ANSWER - Swapping a floating rate
obligation for a fixed rate obligation
How can a govt reduce risk, reduce interest rate? - CORRECT ANSWER - Increase credit
rating, bond insurance, letter of credit, surety bond
What credit rate ratings are considered investment grade bonds? - CORRECT ANSWER -
Credit ratings of AAA to BBB-
What credit rate ratings are considered junk bond? - CORRECT ANSWER - Credit ratings
below BBB-
What are the limitations of the debt service reserve? 1 of 3 - CORRECT ANSWER - May
not exceed 10% of the stated principal amount of the issue.
