municipality bonds

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municipality bonds

by siddhu161 » Fri Jan 24, 2014 10:14 pm
Public hospitals are suffering because of a lack of money available for physical expansion projects. To help hospitals, local governments plan to offer municipal bonds with above-average interest rates to induce individuals to buy these bonds, because as local governments get more money from municipal bonds, more money becomes available to public hospitals for physical expansion projects.

Which of the following, if true, raises the most serious doubt regarding the effectiveness of local governments' plan to increase the amount of money available for hospital expansion projects?

A. When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly.

B. The increased revenue local governments would receive as a result of offering municipal bonds with above-average interest rates would not offset the loss in revenue from personal income taxes during the first year of the plan.

C. Even with interest rate incentives, some people will choose not to buy the municipal bonds.

D. Individuals will generally not buy high-interest municipal bonds unless these bonds, when repaid, will help them cover home and healthcare payments.

E. The municipal bonds would give all buyers, regardless of how many bonds they purchase, the same interest rate per bond.

OA is A but I came up with D. Although D could also be wrong as there is no information on types of bonds municipality offering, I crossed A because it talks about increasing % of (probabely existing)bonds whereas the argument talks about offering new bonds with higher rate.

Please help me with the same.
Source: — Critical Reasoning |

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by bubbliiiiiiii » Sun Jan 26, 2014 8:59 am
I don't understand how A is OA! because if A is true the amount of money available for hospital expansion projects still increases! because even if the proportion is same, the amount increases.
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by Sk1ver » Mon Jan 27, 2014 5:10 am
siddhu161 wrote:Public hospitals are suffering because of a lack of money available for physical expansion projects. To help hospitals, local governments plan to offer municipal bonds with above-average interest rates to induce individuals to buy these bonds, because as local governments get more money from municipal bonds, more money becomes available to public hospitals for physical expansion projects.

Which of the following, if true, raises the most serious doubt regarding the effectiveness of local governments' plan to increase the amount of money available for hospital expansion projects?

A. When local governments increase the interest on municipal bonds, the percentage of government funds allocated to non-expansion government projects increases correspondingly.

B. The increased revenue local governments would receive as a result of offering municipal bonds with above-average interest rates would not offset the loss in revenue from personal income taxes during the first year of the plan.

C. Even with interest rate incentives, some people will choose not to buy the municipal bonds.

D. Individuals will generally not buy high-interest municipal bonds unless these bonds, when repaid, will help them cover home and healthcare payments.

E. The municipal bonds would give all buyers, regardless of how many bonds they purchase, the same interest rate per bond.

OA is A but I came up with D. Although D could also be wrong as there is no information on types of bonds municipality offering, I crossed A because it talks about increasing % of (probabely existing)bonds whereas the argument talks about offering new bonds with higher rate.

Please help me with the same.
Well Im not sure for 100% that ive applied the correct figures, but I think that the logic behind A is the following:

Try to use some numbers

Base case:

Bonds issued - 100$
Interest 10%
Total money - 10$
% allocated to physical expansion - 50% - 5$
% allocated to non-physical expansion - 50% - 5$

Answer choice A says:

Bonds issued - 100$
Interest 15% (increased by 50%)
Total money - 15$
% allocated to physical expansion - 25% - 2.25$
% allocated to non-physical expansion - (allocated percentage increased correspondingly by 50%) 75% * 1.5 = 11.25$

So we can see that physical expansion is now getting less money