CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers
An analyst is evaluating a revenue bond issued to finance a toll road. Which of the following metrics is the analyst most likely to rely on to assess the bond's ability to be repaid?
The analyst would most likely use the debt service coverage ratio of net project revenues. Revenue bonds are repaid from the toll road's own cash flows, so coverage of debt service by those net revenues shows repayment capacity better than general tax base or pension measures.
- ADebt service coverage ratio of net project revenuesCorrect
- BProperty tax base growth of the surrounding region
- CRatio of the issuer's pension liabilities to its total budget
Explanation
Revenue bonds are serviced from project cash flows, so net revenue relative to debt service is the key measure. Tax base and pension metrics matter mainly for general obligation bonds, so they are less relevant here.
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