It is currently 24 Feb 2018, 02:23

### GMAT Club Daily Prep

#### Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

# Events & Promotions

###### Events & Promotions in June
Open Detailed Calendar

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

Author Message
TAGS:

### Hide Tags

VP
Status: Preparing for the GMAT
Joined: 02 Nov 2016
Posts: 1369
Location: Pakistan
GPA: 3.4
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

03 Feb 2017, 03:01
2
This post was
BOOKMARKED
00:00

Difficulty:

55% (hard)

Question Stats:

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

### HideShow timer Statistics

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

_________________

Official PS Practice Questions
Press +1 Kudos if this post is helpful

Intern
Joined: 23 Feb 2016
Posts: 3
Concentration: Strategy, Entrepreneurship
GPA: 3.9
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

06 Feb 2017, 10:00
Can you please explain me this one?
Manager
Joined: 06 Oct 2015
Posts: 54
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

06 Feb 2017, 14:58
Could someone please breakdown B vs E?
Manager
Joined: 21 Jan 2016
Posts: 83
Location: India
GMAT 1: 670 Q50 V30
WE: Engineering (Computer Software)
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

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
Verbal Expert
Joined: 14 Dec 2013
Posts: 3315
Location: Germany
Schools: HHL Leipzig
GMAT 1: 780 Q50 V47
WE: Corporate Finance (Pharmaceuticals and Biotech)
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

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).
Manager
Joined: 16 Oct 2015
Posts: 74
Location: India
Concentration: Technology, General Management
GMAT 1: 520 Q44 V17
GMAT 2: 530 Q44 V20
GMAT 3: 710 Q48 V40
GPA: 3.45
WE: Research (Energy and Utilities)
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

17 Feb 2017, 07:46
could you please elaborate more why option B is correct?
Verbal Expert
Joined: 14 Dec 2013
Posts: 3315
Location: Germany
Schools: HHL Leipzig
GMAT 1: 780 Q50 V47
WE: Corporate Finance (Pharmaceuticals and Biotech)
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

18 Feb 2017, 04:16
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.)
Intern
Joined: 02 Nov 2016
Posts: 26
Schools: ISB '18
WE: Consulting (Consulting)
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

18 Feb 2017, 23:51
2
KUDOS
sayantanc2k 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 ??
Verbal Expert
Joined: 14 Dec 2013
Posts: 3315
Location: Germany
Schools: HHL Leipzig
GMAT 1: 780 Q50 V47
WE: Corporate Finance (Pharmaceuticals and Biotech)
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

21 Feb 2017, 10:32
sakshamgmat wrote:
sayantanc2k 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
Display posts from previous: Sort by