CFA Practice Question
Which of the following rankings is CORRECT concerning the security of a municipal bond. The symbol ">" means "more secure than."
A. Revenue bond > General obligation bond
B. Privately insured revenue bonds > General obligation bonds secured by supplemental fees
C. Pre-refunded bonds > General obligation bonds
Explanation: Pre-refunded bonds are the safest of all municipal bonds. They are secured by the deposit of an equivalent amount of U.S. Treasury securities in a trust as collateral, with matching cash flows.
User Contributed Comments 5
| User | Comment |
|---|---|
| danlan | How about A? |
| george2006 | I guess that C trumped A. |
| jayjunk | If revenue bonds are backed by revenues (possibly from specific sources), whereas general obligation bonds are backed by all sources, that would make general obligation bonds more secure than revenue bonds. |
| kfly | General obligation bond > Revenue bond because investor w/ Revenue bond is only paid if the project backing the bond succeeds |
| ofabian | General obligation bonds are secured by the full faith and credit of the issuing government. Revenue bonds are secured by a revenue source that may or may not continue to support debt service. GO bonds obligate the municipality to step in and use its general fund or raise taxes - no matter what - to ensure payment. The only thing backing revenue bonds are revenues - imagine a toll road - tolls pay the debt service - now imagine a new road is built to compete and draw users away - GO bonds are far more secure. A is not correct. |