CFA Level I · CFA Level I Exam · Credit Risk
When analyzing the credit risk of a municipal revenue bond, an analyst would most likely view a debt service coverage ratio of 1.8 compared with 1.1 as indicating:
A coverage ratio of 1.8 indicates a stronger cushion for meeting debt payments than 1.1. The ratio measures net revenues relative to debt service, so a higher figure means a larger safety margin. It says nothing about taxing power, which is relevant to general obligation bonds.
- Aa weaker ability to meet debt payments.
- Ba stronger cushion for meeting debt payments.Correct
- Ca greater reliance on taxing power.
Explanation
Debt service coverage compares net project revenues to debt service. A higher ratio means more revenue per unit of debt service, giving a larger margin of safety. It does not relate to taxing power, which supports GO bonds.
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