63 Credit Analysis for Government Issuers

Podcast

Play an AI-generated podcast conversation about this lesson

Download our mobile app to listen on the go

Get App

Questions and Answers

Compared to corporate bonds with the same credit ratings, municipal general obligation (GO) bonds typically have less credit risk because:

GOs are not affected by economic downturns.
governments can print money to repay debt.
default rates on GOs are typically lower for same credit ratings. (correct)

City council of a U.S. municipality has authorized the issuance of $100 million bonds to finance the construction of a toll road. This bond would most likely be characterized as a(n):

agency bond.
general obligation (GO) bond.
revenue bond. (correct)

A credit analyst determines that one of the sovereign governments it recently assessed has a very high interest-to-GDP ratio, while also having low real GDP growth volatility. Based on these two factors only, the analyst would likely conclude that the sovereign government has:

weak fiscal strength and strong economic growth and stability factors.
strong fiscal strength and weak economic growth and stability factors.
weak fiscal strength and weak economic growth and stability factors. (correct)

Which of the following statements about municipal bonds is least accurate?

Revenue bonds have lower yields than general obligation bonds because they are backed by specific projects. (B) Signup and view all the answers

Compared to general obligation (GO) bonds, revenue bonds typically:

have higher yields. (A) Signup and view all the answers

An institutional investor is considering purchasing sovereign government debt, but is worried that in the event the issuing government refused to pay its obligations, it would have no recourse to the government. To evaluate this risk, the investors should assess the sovereign government's:

institutions and policy factors. (B) Signup and view all the answers

Which of the following statements about municipal general obligation (GO) bonds and revenue bonds is most accurate?

Only GO bonds are effectively funded by taxpayers. (B) Signup and view all the answers

Flashcards

Municipal Bond Default Risk

Municipal bonds often have lower default rates compared to corporate bonds with similar credit ratings.

Revenue Bond

A bond issued by a local or regional government, backed by the revenue from a specific project (e.g., tolls from a toll road).

Sovereign Government Assessment Factors

High interest-to-GDP ratio suggests weak fiscal strength; low real GDP growth volatility suggests strong economic stability.

General Obligation Bonds (GO)

GO bonds are backed by the issuer's full faith, credit, and taxing power, generally offering lower yields than revenue bonds.

Signup and view all the flashcards

Revenue Bond Yields

Revenue bonds typically have higher credit risk and yields than GO bonds, as repayment depends only on the project's revenue.

Signup and view all the flashcards

Evaluating Sovereign Debt

Assess a government's willingness to repay its debts by evaluating institutions and policies; fiscal flexibility and monetary effectiveness assess its ability to pay.

Signup and view all the flashcards

Funding Sources for Municipal Bonds

GO bonds are funded by taxpayers, whereas revenue bonds are backed by revenue from specific projects.

Signup and view all the flashcards

Study Notes

Municipal General Obligation Bonds vs. Corporate Bonds

Municipal GO bonds usually have lower default rates compared to corporate bonds with the same credit ratings
GO bonds' creditworthiness is affected by economic downturns
Sovereigns can print money to repay debt, but municipalities cannot

Revenue Bonds

Revenue bonds are issued by local or regional governments
They are backed by the revenue of a specific project

Agency Bonds

Agency bonds are bonds issued by government agencies

General Obligation Bonds

GO bonds are (senior) unsecured bonds backed by unspecific revenues of the issuing government

Sovereign Government Assessment

High interest-to-GDP ratio indicates weak fiscal strength, implying weaker debt affordability
Low real GDP growth volatility indicates stronger economic growth and stability factors

Municipal Bond Guarantees

General obligation bonds are backed by the full faith, credit, and taxing power of the issuer
General obligation bonds tend to have lower yields than revenue bonds.

Revenue Bonds vs GO Bonds

Revenue bonds typically have higher credit risk than GO bonds
The sole revenue source for revenue bond repayment are the projects being financed
Revenue bonds typically have higher yields than GO bonds
GO bonds are backed by the full faith and credit of the issuing government

Sovereign Government Debt Risk Evaluation

Investors should evaluate the government's willingness to repay its obligations
This assessment is incorporated under institutions and policy factors.
Fiscal flexibility factors (like capacity to collect taxes) and monetary effectiveness factors (like central bank actions) measure the sovereign government's ability to repay its obligations.