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

An analyst compares two regional governments with similar debt burdens. Region X receives a large share of its revenue as transfers from the national government, while Region Y raises most of its revenue from its own taxes. Compared with Region Y, Region X's credit risk is most likely to be more sensitive to:

Region X is more sensitive to the fiscal policy and financial condition of the national government. Because much of its revenue comes from national transfers, cuts or delays in those transfers directly affect its ability to pay, whereas Region Y depends more on its own local tax base.

  1. AThe fiscal policy and financial condition of the national governmentCorrect
  2. BFluctuations in the local property market only
  3. CThe exchange rate of the national currency only

Explanation

Heavy dependence on intergovernmental transfers links Region X's revenue to national budget decisions and the central government's finances. Region Y, relying on own taxes, is more exposed to its local economy.

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