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Question

Difficulty: EasyGovernment, Municipal, and Corporate Bonds

Match each bond type with its primary security or backing mechanism.

  • Treasury Inflation-Protected Securities (TIPS)Principal value adjusts periodically based on changes in the Consumer Price Index (CPI)
  • General Obligation (GO) Municipal BondsBacked by the full faith, credit, and general taxing power of the municipality
  • Corporate DebenturesUnsecured debt backed only by the general creditworthiness of the corporation
  • Municipal Revenue BondsBacked by dedicated project user fees or revenue streams

Answer

TIPS match with principal adjustment based on CPI; General Obligation bonds match with full faith, credit, and taxing power; Corporate debentures match with unsecured debt backed by general creditworthiness; Municipal revenue bonds match with backing by project user fees.
Each debt instrument is correctly paired with its specific security features: TIPS adjust principal with CPI, General Obligation bonds depend on municipal taxing authority, corporate debentures are unsecured debt instruments, and revenue bonds rely on project earnings.

Step-by-Step Solution

1
Identify the defining inflation-protection mechanism of TIPS
TIPS principal adjusts with the Consumer Price Index (CPI)
U.S. Treasury TIPS are explicitly indexed to CPI to mitigate inflation risk.
2
Distinguish between General Obligation and Revenue municipal backing
GO bonds use general tax revenues, whereas Revenue bonds use specific facility fees
GO bonds carry the full faith and credit taxing power of the municipality, while Revenue bonds are self-supporting from project revenues.
3
Determine corporate debenture security structure
Debentures are unsecured corporate bonds
Debentures rely solely on corporate creditworthiness rather than pledged physical assets.

Key Concept

Bond Security Backing Mechanisms and Issuer Classifications
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Topics

Government, Municipal, and Corporate Bonds

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