One Issuer, Three Ways to Be Paid

Rule 25 of 32 in this unit2.1.2

2.1.2 Debt Instruments

SIE outline 2.1.2

One Issuer, Three Ways to Be Paid

A direct U.S. obligation: credit risk near zero. Interest-rate risk scales with maturity. Only the payment form changes: none, fixed, or inflation-adjusted.

The method for this kind of question

Term + payment form names the instrument.

Now answer

1 question on this screen, from this outline item's own pool, so some will test a rule you met earlier in the unit. Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen here, and the coach treats it that way.

Question 1Exam level

A general obligation municipal bond defaults. What may its holders do that a revenue bond's holders generally cannot?

A. Compel a tax levy or legislative appropriation to satisfy the obligation B. Force the sale of the project the bond financed C. Convert their bonds into shares of the issuer D. Demand FDIC reimbursement

How sure are you?

Sure Fairly sure Guessing

Correct: A. On default, general obligation bondholders have the right to compel a tax levy or legislative appropriation, a power tied to the issuer's own taxing authority that a revenue bond does not pledge.

B. Forcing a project sale is not the named GO remedy; the remedy runs through the issuer's taxing power, not the physical asset.

C. Municipal bonds are debt, not convertible into equity of a governmental issuer.

D. The FDIC insures bank deposits, not municipal bond defaults.

Unit: SIE outline 2.1.2

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