CFA Level I · CFA Level I Exam · Credit Analysis for Government Issuers
When assessing the credit quality of a general obligation bond issued by a city, which factor is an analyst most likely to consider as a key institutional strength?
The city's legal power to raise taxes and adjust its budget is the institutional strength. Greater fiscal flexibility supports debt repayment. A narrow economy dependent on one employer and a rising debt-to-tax-base ratio are weaknesses that increase credit risk.
- AA narrow economy dependent on one employer
- BThe city's legal power to raise taxes and adjust its budgetCorrect
- CA rising ratio of debt to the local tax base
Explanation
Institutional framework includes legal authority to levy taxes and manage budgets, which supports repayment. The other two options are credit weaknesses: economic concentration and rising debt burden.
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