CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers
When analyzing a general obligation bond issued by a local government, which factor is most likely to be the most important indicator of the issuer's ability to service its debt?
The issuer's tax base and the stability of its tax revenue matter most. General obligation bonds are repaid from general taxing power, so a large, diverse and stable tax base indicates stronger capacity to service debt. Coupon rate and bond age do not measure repayment capacity.
- AThe coupon rate set at issuance
- BThe issuer's tax base and the stability of its tax revenueCorrect
- CThe number of years since the bond was first issued
Explanation
General obligation bonds rely on the issuer's taxing power, so the size, diversity and stability of the tax base drive repayment capacity. The coupon and bond age do not measure the ability to pay.
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