Select the best answer.
1. A government repaves a section of highway every four years at a cost of $2 million to preserve it at a specific condition level. How much should it report in depreciation charges under the modified approach to accounting for infrastructure? The standard approach?
Modified Approach Standard Approach
a. $ 0 $ 0
b. $500,000 $500,000
c. $500,000 $ 0
d. $ 0 $500,000

2. States typically maintain investment pools for their towns and counties primarily to
a. Provide the participants with the benefits of increased portfolio size
b. Ensure that the participants adhere to all state investment laws and policies
c. Enable the participants to enhance internal and administrative controls over their investments
d. Spread the risk of losses among the participants

3. When a city enters into a repurchase agreement, it will typically
a. Give an investor the opportunity to repurchase equity securities that it will sell to the investor
b. Borrow cash from a bank with the understanding that it will use the cash to repurchase bonds that the city previously issued
c. Sell securities to an investor guaranteeing that it will repurchase them at a higher price
d. Buy securities from a third party with the promise that the third party will repurchase the securities at a higher price

4. A government would typically enter into a reverse repurchase agreement in order to
a. Borrow cash for a short period of time
b. Invest cash overnight or for some other short period of time
c. Diversify its investment portfolio
d. Hedge its investments against fluctuations in interest rates

5. Derivatives are
a. Variable interest rate bonds, the interest rate on which is derived from (based on) the prime rate of interest
b. Shares of common stock, the value of which is derived from the market value of the underlying assets (typically investments in subsidiaries) of the issuing corporation
c. Investments, the value of which is derived from some underlying asset or reference rate
d. Investment pools, the value of which is derived from the pools’ investments

6. Which of the following statements is true with respect to derivatives?
a. They are highly speculative instruments and therefore are suitable only for governments that are willing to accept a high degree of investment risk.
b. Their market values are typically less volatile than those of the underlying assets.
c. GASB standards require that governments explain in their annual reports the reasons why they invested in derivatives.
d. They need not be reported on governments’ financial statements; they need only be disclosed in notes to the financial statements.

7. The risk that a company will go bankrupt and thereby be unable to repay a bond that a government holds as an investment is known as
a. Credit risk
b. Market value risk
c. Interest rate risk
d. Counterparty risk

8. Investments would generally be considered subject to the least credit risk if they are
a. Registered in the government’s name but in the possession of a broker-dealer
b. Registered in the government’s name and in the physical possession of the government itself
c. Registered in the broker-dealer’s name and in the possession of the broker-dealer
d. Registered in the broker-dealer’s name but in the possession of the government itself

9. A city needs to determine whether it should sell its downtown administrative facility and move to an outlying location. The value of the facility that is most relevant to this decision is
a. Historical cost
b. Current market value
c. Historical cost less accumulated depreciation
d. Assessed value

10. Which of the following costs should not be included in the cost of a highway that a county constructed itself?
a. Insurance premiums paid while the project was under construction
b. Interest incurred on debt used to finance the project while it was under construction
c. Overhead costs of the construction department
d. Fees paid to consultants to determine the high-way’s optimum route