GMAT Question of the Day - Daily to your Mailbox; hard ones only

 It is currently 22 Jun 2018, 00:20

### 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

Director
Status: Impossible is not a fact. It's an opinion. It's a dare. Impossible is nothing.
Affiliations: University of Chicago Booth School of Business
Joined: 26 Nov 2009
Posts: 872
Location: Singapore
Concentration: General Management, Finance
Schools: Chicago Booth - Class of 2015
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

11 Aug 2010, 23:25
3
5
00:00

Difficulty:

45% (medium)

Question Stats:

67% (01:49) correct 33% (01:51) wrong based on 403 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.
Senior Manager
Joined: 23 May 2010
Posts: 313
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

12 Aug 2010, 02:16
1
nusmavrik wrote:
This one is strange. What do you think guys?

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?
chain of events :
increased tax base by channelising investments in bonds ----> increased tax collections -----> money for building schools
(A) Most Northopolis citizens would be reluctant to support a tax increase to pay for new school buildings.
Distorted facts... possibility of tax increase has not been mentioned .... The plan is to increase the tax base ( i.e. number of people who will be paying the taxes ..

(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.
B -- directly hits the chain : hence correct answer

(C) Many popular investments are created by pooling state and municipal bonds to create tax-exempt index funds.
( irrelevant info ...because we donont know whether these invesments are channelised for social causes like making a school)
(D) Estimates of the cost of five new school buildings vary from well below \$200 million to well above \$200 million.
we are not concerned about the total cost of the making school as it is immaterial to people who will be investing in the bonds

(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.
( it doesnot matter whether local people or peole from other cities are investing money in bonds ...it will strenghten as you will have more money in the fund )

regards
P S -- must be a question from LSAT or Kaplan
Manager
Joined: 29 Jul 2010
Posts: 117
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

12 Aug 2010, 02:35
1
Yes it can affect a city's tax revenues but how it's connected with conclusion that bounds might not generate revenue??
Manager
Joined: 11 May 2010
Posts: 190
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

12 Aug 2010, 08:52
3
After a lot of POE, B it is.

The conclusion is:

thereby paying for the buildings with revenues from an expanding tax base.

B said:

bond issues can severely affect a city's tax revenues for the life of the bond

The city hoped to build the schools with a lot of revenues. B points out a reason that the revenues will not be as much as the city expected.
Senior Manager
Joined: 03 Nov 2005
Posts: 356
Location: Chicago, IL
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

12 Aug 2010, 09:10
1
nusmavrik wrote:
This one is strange. What do you think guys?

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.

Seems like the argument is based on the assumption that a \$200 million bond is not significant enough to cause any changes in an expending tax base. However, B states the the possibility that this bond issue can severly affect the city's tax revenues in either positive or negative ways. In case of the latter, A bond issue can even preclude a tax revenue base from expanding making the bond issue really inattractive as a financing alternative.
_________________

Hard work is the main determinant of success

Manager
Joined: 24 Dec 2009
Posts: 197
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

13 Aug 2010, 12:01
1
(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.

Because, the interest earned on the municipal bonds is tax-exempt, eventually government is losing that money and causing the tax revenues to decrease.

Hence B for me.
Director
Status: 1,750 Q's attempted and counting
Affiliations: University of Florida
Joined: 09 Jul 2013
Posts: 509
Location: United States (FL)
Schools: UFL (A)
GMAT 1: 600 Q45 V29
GMAT 2: 590 Q35 V35
GMAT 3: 570 Q42 V28
GMAT 4: 610 Q44 V30
GPA: 3.45
WE: Accounting (Accounting)
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

03 Oct 2013, 22:28
1
This question is from GMAT HACKS daily question of the day archive. I'm not sure when this question originally appeared on Jeff Sackmann's site but it reappeared on March 19, 2013. Here is the link to the question from 2013 http://www.gmathacks.com/daily/20130319-gmat-question-of-the-day.html.

The Official Explanation is as follows:

Answer: B This is a weaken question. The argument makes a rather odd claim. Much of the passage concerns the benefits of municipal bonds, including a suggesting that Northopolis issue such a bond. Then the conclusion is that the city will pay for new school buildings with tax revenues. Money from bond issues is not the same thing, so it's unclear what one has to do with the other. To weaken the argument, that distinction--the assumption that issuing a bond will somehow increase tax revenues--must be made clear. Consider each choice:

(A) This is irrelevant, as it doesn't address either the bond issue or the effect of "reluctance" on tax revenues. (B) This is correct. It relates the existence of the proposed bond issue to tax revenues, which would decrease as a result of the bond issue. (C) This is irrelevant, as it doesn't address tax revenues. (D) Again, this choice is irrelevant; the cost of the buildings is not what the conclusion of the argument is about. (E) This is outside of the scope. If anything, it weakens the argument by suggesting that the bond issue will not have a direct impact on local finances.

NOTE: I added additional Tags to the question as there was only one field used.
SVP
Status: Preparing for the GMAT
Joined: 02 Nov 2016
Posts: 1543
Location: Pakistan
GPA: 3.39
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

03 Feb 2017, 04:01
2
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.
_________________

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

Manager
Joined: 06 Oct 2015
Posts: 53
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

06 Feb 2017, 15:58
Could someone please breakdown B vs E?
Manager
Joined: 21 Jan 2016
Posts: 82
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, 06:16
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: 3201
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, 05:43
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: 71
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, 08:46
could you please elaborate more why option B is correct?
Verbal Expert
Joined: 14 Dec 2013
Posts: 3201
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, 05:16
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: 24
Schools: ISB '18
WE: Consulting (Consulting)
City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

19 Feb 2017, 00:51
2
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: 3201
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, 11:32
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.)
SVP
Joined: 12 Dec 2016
Posts: 1897
Location: United States
GMAT 1: 700 Q49 V33
GPA: 3.64
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

31 Jan 2018, 09:59
1
this question is not hard to understand, and nothing is strange here.
Nevertheless, test takers will not use outside knowledge or any analytic skills for this question.
Here is an idea: growing population -> more tax revenues for the city. However, people want tax exempt -> put in munical investment -> the fund is used to build the school.

For gmat, C,D,E are all out of scope.
In A, people from other parts of the world still buy the bonds, and there is no need to increase the tax to build the school. B is left.
THe argument structure is clear even though the structure is confusing.
Senior Manager
Joined: 08 Jan 2018
Posts: 262
Location: United States (ID)
GPA: 3.33
WE: Accounting (Accounting)
Re: City Council: Cities may issue municipal bonds to fund public projects [#permalink]

### Show Tags

21 May 2018, 14:07
the argument says that "because of expanding tax base, people will hold bonds, and also the city will receive more tax revenues; as a result, the city will have the fund to build the school."
B points out that "that many people choose to hold bond will negatively affect the tax revenues"
Re: City Council: Cities may issue municipal bonds to fund public projects   [#permalink] 21 May 2018, 14:07
Display posts from previous: Sort by