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# Strange one !

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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
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11 Aug 2010, 23:25
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Difficulty:

55% (hard)

Question Stats:

65% (02:45) correct 35% (01:56) wrong based on 306 sessions

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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.
[Reveal] Spoiler: OA

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12 Aug 2010, 02:16
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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
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12 Aug 2010, 02:35
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Yes it can affect a city's tax revenues but how it's connected with conclusion that bounds might not generate revenue??
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12 Aug 2010, 08:52
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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.
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12 Aug 2010, 09:10
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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.
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13 Aug 2010, 12:01
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(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.
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13 Aug 2010, 12:13
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B for me too.
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03 Oct 2013, 22:28
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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.
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10 Nov 2014, 01:25
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

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Re: Strange one !   [#permalink] 10 Nov 2014, 01:25
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