CFA Level I · CFA Level I Exam · Credit Risk
Compared with a general obligation (GO) municipal bond, a revenue bond issued to fund a toll road is most likely to:
A toll road revenue bond most likely depends on cash flows generated by the financed project, such as toll receipts. Full taxing power backs general obligation bonds instead, so claims of a tax-backed claim describe the wrong type of municipal security.
- Abe backed by the issuer's full taxing power.
- Bdepend on cash flows generated by the financed project.Correct
- Ccarry lower credit risk because it has a legal claim on all tax receipts.
Explanation
Revenue bonds are serviced by revenues from the specific project, such as toll receipts. GO bonds are backed by the issuer's taxing authority, so the first and third options describe GO bonds, not revenue bonds.
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