CPFO Debt UPDATED ACTUAL Exam
Questions and CORRECT Answers
Tax-increment Financing Bonds - CORRECT ANSWER - Issued to promote revitalization
of a given geographic area
- Debt is paid from the increase in property taxes generated from increased assessed values
- Can be risky
Bond Covenants - CORRECT ANSWER - Promises a government makes about paying for
the bond.
Usually includes
- Rate covenants
- Additional bond test
- Operation and maintenance requirements
May be required to have a debt service reserve fund and/or bond insurance
Limited Tax Government Obligation Bond - CORRECT ANSWER - Issued when debt
limits become a factor.
Government pledges property tax up to a certain amount or secures the bond with available
general fund revenues
Liquidity Facility - CORRECT ANSWER - short-term financing option such as a letter of
credit
Capital Improvement Plan - CORRECT ANSWER - A plan, adopted by the board, that
identifies projects to be funded, funding sources, and project expenditures over time.
Private-Activity Bonds - CORRECT ANSWER - Bonds for which:
,1. Greater than 10% of the proceeds will be used by a private entity or will finance facilities to be
used by private entity and
2. Payment of the principle of or interest on greater than 10% of the balance will be paid from or
secured by private sources
Exempt Facility Bonds - CORRECT ANSWER - A type of private activity bond that is
tax-exempt
95% or greater of the net proceeds are used to finance a facility, and the facility must be
available on a regular basis for general public use
Qualified 501(c)(3) Bonds - CORRECT ANSWER - A type of tax exempt private - activity
bond
Issued for projects of 501 (c)(3) non-profit organizations such as educational or healthcare
facilities
General Obligation Bonds - CORRECT ANSWER - Bonds used to finance government
improvements that benefit the community as a whole
Secured by the full faith and credit and taxing authority of the issuer
Revenue Bonds - CORRECT ANSWER - Bonds issued to finance facilities that have a
definable user or revenue base
Secured by a special source of funds: 1) operations of the project being financed or 2) a
dedicated revenue stream
Double-barreled bonds - CORRECT ANSWER - Bonds which are secured by both a
dedicated revenue stream as well as a government taxing power
, Special Assessment/Special Improvement District Bonds - CORRECT ANSWER - Bonds
issued to finance improvements that benefit a specific area
Certificates of Participation (COPs) - CORRECT ANSWER - Lease-purchase agreements
where the government leases an asset over a specified time with a predetermined cost sufficient
to cover principal and interest; the lesser identifies investors to find the asset and the investors'
interest is tax-exempt
Variable-rate Instruments - CORRECT ANSWER - Bonds that are structured with
maturities as long as an issuer's fixed rate (example, 20-30 years), but where interest is adjusted
daily, weekly, or at some other interval
Variable Demand Rate Obligations (VRDO) - CORRECT ANSWER - Debt instruments
with long-term maturities and a coupon interest rate that is reset periodically. Includes a demand
or "put" feature that permits the investor to require repayment of debt at the time of reset or at
other intervals. Issuers usually also purchase a liquidity facility to offset risk of the put feature
being used.
Auction Rate Securities - CORRECT ANSWER - Variable rate securities where the
interest-rate is reset periodically using a Dutch auction process.
Dutch auction - CORRECT ANSWER - May be used with variable rate securities,
investors submit the interest-rate they require to continue to hold or to purchase securities to an
auction agent. The lowest interest-rate necessary to sell the entire amount of securities becomes
the interest rate at which all securities are sold.
Derivatives - CORRECT ANSWER - Financial instruments whose own value is based
upon (derived from) the value of other assets, indices of asset values, or interest rate levels.
Fixed-to-floating Interest Rate Swap - CORRECT ANSWER - A derivative instrument the
permits and issuer of fixed - rate debt to exchange interest payments for floating - rate payments
over the term of the swap contract.
Questions and CORRECT Answers
Tax-increment Financing Bonds - CORRECT ANSWER - Issued to promote revitalization
of a given geographic area
- Debt is paid from the increase in property taxes generated from increased assessed values
- Can be risky
Bond Covenants - CORRECT ANSWER - Promises a government makes about paying for
the bond.
Usually includes
- Rate covenants
- Additional bond test
- Operation and maintenance requirements
May be required to have a debt service reserve fund and/or bond insurance
Limited Tax Government Obligation Bond - CORRECT ANSWER - Issued when debt
limits become a factor.
Government pledges property tax up to a certain amount or secures the bond with available
general fund revenues
Liquidity Facility - CORRECT ANSWER - short-term financing option such as a letter of
credit
Capital Improvement Plan - CORRECT ANSWER - A plan, adopted by the board, that
identifies projects to be funded, funding sources, and project expenditures over time.
Private-Activity Bonds - CORRECT ANSWER - Bonds for which:
,1. Greater than 10% of the proceeds will be used by a private entity or will finance facilities to be
used by private entity and
2. Payment of the principle of or interest on greater than 10% of the balance will be paid from or
secured by private sources
Exempt Facility Bonds - CORRECT ANSWER - A type of private activity bond that is
tax-exempt
95% or greater of the net proceeds are used to finance a facility, and the facility must be
available on a regular basis for general public use
Qualified 501(c)(3) Bonds - CORRECT ANSWER - A type of tax exempt private - activity
bond
Issued for projects of 501 (c)(3) non-profit organizations such as educational or healthcare
facilities
General Obligation Bonds - CORRECT ANSWER - Bonds used to finance government
improvements that benefit the community as a whole
Secured by the full faith and credit and taxing authority of the issuer
Revenue Bonds - CORRECT ANSWER - Bonds issued to finance facilities that have a
definable user or revenue base
Secured by a special source of funds: 1) operations of the project being financed or 2) a
dedicated revenue stream
Double-barreled bonds - CORRECT ANSWER - Bonds which are secured by both a
dedicated revenue stream as well as a government taxing power
, Special Assessment/Special Improvement District Bonds - CORRECT ANSWER - Bonds
issued to finance improvements that benefit a specific area
Certificates of Participation (COPs) - CORRECT ANSWER - Lease-purchase agreements
where the government leases an asset over a specified time with a predetermined cost sufficient
to cover principal and interest; the lesser identifies investors to find the asset and the investors'
interest is tax-exempt
Variable-rate Instruments - CORRECT ANSWER - Bonds that are structured with
maturities as long as an issuer's fixed rate (example, 20-30 years), but where interest is adjusted
daily, weekly, or at some other interval
Variable Demand Rate Obligations (VRDO) - CORRECT ANSWER - Debt instruments
with long-term maturities and a coupon interest rate that is reset periodically. Includes a demand
or "put" feature that permits the investor to require repayment of debt at the time of reset or at
other intervals. Issuers usually also purchase a liquidity facility to offset risk of the put feature
being used.
Auction Rate Securities - CORRECT ANSWER - Variable rate securities where the
interest-rate is reset periodically using a Dutch auction process.
Dutch auction - CORRECT ANSWER - May be used with variable rate securities,
investors submit the interest-rate they require to continue to hold or to purchase securities to an
auction agent. The lowest interest-rate necessary to sell the entire amount of securities becomes
the interest rate at which all securities are sold.
Derivatives - CORRECT ANSWER - Financial instruments whose own value is based
upon (derived from) the value of other assets, indices of asset values, or interest rate levels.
Fixed-to-floating Interest Rate Swap - CORRECT ANSWER - A derivative instrument the
permits and issuer of fixed - rate debt to exchange interest payments for floating - rate payments
over the term of the swap contract.
