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City Council: Cities may issue municipal bonds to fund public projects

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City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 03 Feb 2017, 03:01
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Question Stats:

67% (01:50) correct 33% (02:11) wrong based on 166 sessions

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City Council: Cities may issue municipal bonds to fund public projects. Because the interest paid to the bond holder is tax-exempt, municipal bonds are an attractive investment. So, to pay for the five state-of-the-art school buildings needed to accommodate our growing student population, Northopolis should issue a ten-year, $200 million bond, thereby paying for the buildings with revenues from an expanding tax base.

Which of the following, if true, casts the most serious doubt on the likelihood that the bond issue recommended above will have the result that is claimed?

(A) Most Northopolis citizens would be reluctant to support a tax increase to pay for new school buildings.
(B) Because municipal bond interest is tax-exempt, bond issues can severely affect a city's tax revenues for the life of the bond, despite the short-term benefits.
(C) Many popular investments are created by pooling state and municipal bonds to create tax-exempt index funds.
(D) Estimates of the cost of five new school buildings vary from well below $200 million to well above $200 million.
(E) A significant percentage of municipal bonds issued by cities such as Northopolis are purchased by investors from other cities who aim to diversify their bond portfolios.
[Reveal] Spoiler: OA

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Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 06 Feb 2017, 10:00
Can you please explain me this one?
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Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 06 Feb 2017, 14:58
Could someone please breakdown B vs E?
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Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 07 Feb 2017, 05:16
Even though I got the correct answer. But still need to validate my understanding here. The conclusion is that City will pay for its schools with revenues from expanding tax base. But since, these bond's interest is tax free, they might not serve the purpose. Which is mentioned in B
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Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 17 Feb 2017, 04:43
pafrompa wrote:
Could someone please breakdown B vs E?


Your query has been well explained by ankujgupta in the above post.

E is irrelevant, because it does not relate to tax. Moreover, this option states a strength of such bonds, whereas the correct option should mention a weakness (specifically, related to tax).
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City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 17 Feb 2017, 07:46
could you please elaborate more why option B is correct?
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City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 18 Feb 2017, 04:16
askul2389 wrote:
could you please elaborate more why option B is correct?


Option B states that the bond interest is tax-exempt. Therefore this option states a point against the argument based on "paying for the buildings with revenues from an expanding tax base". Thus B is correct. (The two underlined portions oppose each other.)
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City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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sayantanc2k wrote:
askul2389 wrote:
could you please elaborate more why option B is correct?


Option B states that the bond interest is tax-exempt. Therefore this option states a point against the argument based on "paying for the buildings with revenues from an expanding tax base". Thus B is correct. (The two underlined portions oppose each other.)


I agree on this but one thing that is confusing is that the statement " the bond interest is tax-exempt" is mentioned in the premise of the argument and not introduced newly in the option B.

Also, the conclusion about paying for the buildings from an expanding tax base dos not follow from the premises in the argument as the argument clearly states that the bond interest is tax free .

How does B weaken the argument if the tax free point is already mentioned in the premise of the argument ??
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City Council: Cities may issue municipal bonds to fund public projects [#permalink]

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New post 21 Feb 2017, 10:32
sakshamgmat wrote:
sayantanc2k wrote:
askul2389 wrote:
could you please elaborate more why option B is correct?


Option B states that the bond interest is tax-exempt. Therefore this option states a point against the argument based on "paying for the buildings with revenues from an expanding tax base". Thus B is correct. (The two underlined portions oppose each other.)


I agree on this but one thing that is confusing is that the statement " the bond interest is tax-exempt" is mentioned in the premise of the argument and not introduced newly in the option B.

Also, the conclusion about paying for the buildings from an expanding tax base dos not follow from the premises in the argument as the argument clearly states that the bond interest is tax free .

How does B weaken the argument if the tax free point is already mentioned in the premise of the argument ??


The passage uses the part "tax exempt" to show why there would be more buyers and then concludes (wrongly) that more buyers would mean increase in tax base (absolutely ignoring the first cause-effect relation): tax exempt---> more buyers ---> increase in tax base.

Option B shows the problem in the above argument, showing that the same feature "tax exempt" would not help increase the tax base.

(Cannot say that this is a very high quality GMAT-like question.)
City Council: Cities may issue municipal bonds to fund public projects   [#permalink] 21 Feb 2017, 10:32
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