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SPEA-V 186 Final Exam Questions With Solutions Scored A+.
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How is Debt funded? - Answer •1) Treasury Bonds-Federal Gov't •2) Municipal Debt- State and Local Gov't Unfunded liabilties - Answer A debt in the future that does not have money set aside Government debt results from 3 conditions - Answer 1) covering deficits (annual expenditur...

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  • February 6, 2025
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  • 2024/2025
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SPEA-V 186 Final Exam Questions With
Solutions Scored A+.
How is Debt funded? - Answer •1) Treasury Bonds-Federal Gov't

•2) Municipal Debt- State and Local Gov't



Unfunded liabilties - Answer A debt in the future that does not have money set aside



Government debt results from 3 conditions - Answer 1) covering deficits (annual expenditures in excess
or revenues)

2) Financing capital projects

3) Covering short periods within a fiscal period in which bills exceed the cash on hand.



What does rolled over mean? - Answer The cash to pay the principal comes from additional borrowing.
This is how deficits become debt, and the only way to retire the debt becomes surpluses. We roll over
debt all the time through the treasury market. BECOMES A NEW BOND!



What are two important measures of debt? - Answer 1) Gross debt- equals all the federal debt
outstanding

•Federal agency or trust funds (social security) holds roughly half of federal securities in 2005. They
acquire debt in their cash management programs, and place the surplus funds in US Treasury Notes

2) Debt held by private investors- equals all federal debt held except that held by federal accounts and
the Federal Reserve System.



•The debt on the State and Local level is identified as Municipal Debt and Municipal bonds are issued to
cover the debt. There are two kinds: - Answer •1)Full faith and credit obligations- "have an unlimited
claim" on the taxes and other revenues of the issuing unit. Otherwise known as General Obligation
Bonds (GOB's). Issued for Any purpose relating to Government service. Constitution in each state gives
guidelines.

•2)Non guaranteed debt- lacks this assurance and are sold on the basis of repayment from particular
revenue sources only. Otherwise known as Revenue Bonds. Issued for Capital Projects and Infrastructure
with a revenue source

•Full faith & Credit bonds (GOB) bear a lower risk, thus a lower interest rate than Revenue Bond.

, •Golden Rule of Debt Issues - Fundamental Policy - Answer •Do not issue debt for a maturity longer
than the financed project's useful life.

•If debt maturity is longer than useful life, the projects true annual cost has been understated, while if
debt maturity is shorter, annual cost has been overstated and we receive benefits in excess w/out
payments. Timing capital projects avoids distortions in budgets

•Remember the Golden Rule of Capital Projects- match current revenue to spending on current services,
but borrow to support the capital spending and thereby maintain the net worth of the public sector.



Municipal Debt - Answer •Long term state debt is ¾ (75%) Non Guaranteed aka Revenue Bonds

•Short term debt at both levels is almost exclusively Full Faith and Credit aka GOB's

•Non guaranteed debt is outside limits frequently placed on municipalities by state statute or
constitution

•Municipal Debt- Interest qualifies for exclusion from federal taxation. Both Types. Reason why so
popular



Revenue Bond Debt (Non-Guaranteed Debt) is: - Answer issued by public authorities, entities with
public powers that operate outside the normal constraints placed on gov'ts. These authorities are
formed to build public projects and pay off bonds used to finance the construction of the projects with
charges from the users; the authorities seldom have taxing power.



Coupon Rate - Answer •the percentage of par value (bond amount) that will be interest on a regular
basis. Thus 5% on a $1000 means $50 would be paid annual or $25 semi-annual.



Par Value - Answer •The amount the bond issue is worth or Principal.



Maturity - Answer •How many years it takes to pay off the bond.



These three characteristics defining a bond issue are constant, static, and they never change. - Answer
•Coupon Rate- the percentage of par value (bond amount) that will be interest on a regular basis. Thus
5% on a $1000 means $50 would be paid annual or $25 semi-annual.

•Par Value - The amount the bond issue is worth or Principal.

•Maturity - How many years it takes to pay off the bond.

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