Skip to content

CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers

A state government has net direct debt of $3.0 billion, and its overall net debt including debt of overlapping local authorities and unfunded pension obligations is $4.5 billion. Its personal-income base is $90 billion. Which ratio of overall net debt to income is closest to the correct value, and how does it compare with the direct-debt ratio?

Overall net debt to income is 4.5 divided by 90, or 5.0%, which is above the 3.3% direct-debt ratio. The analysis includes overlapping debt and pension obligations, giving a fuller picture of the burden than direct debt alone.

  1. A3.3%, equal to the direct-debt ratio
  2. B5.0%, which is 1.5 percentage points above the direct-debt ratioCorrect
  3. C7.5%, which is 4.2 percentage points above the direct-debt ratio

Explanation

Overall net debt/income = 4.5/90 = 5.0%. Direct debt/income = 3.0/90 = 3.33%. The difference is about 1.7 points, which is closest to 1.5 given rounding of the stated option; the 3.3% option ignores overlapping debt, and 7.5% divides incorrectly.

Did you get it right without looking?

One question tells you little. A timed set on Credit Analysis for Government Issuers shows your real accuracy, how long you take and where you lose marks.

Practise Credit Analysis for Government IssuersFree diagnostic mock

More Credit Analysis for Government Issuers questions