Traverse County needs a new county government building that would cost $10 million. The politicians feel that voters will not approve a municipal bond issue to fund the building because it would increase taxes. They opt to have a state bank issue $10 million of tax-exempt securities to pay for the building construction. The county then will make yearly lease payments (of principal and interest) to repay the obligation. Unlike conventional municipal bonds, the lease payments are not binding obligations on the county and, therefore, require no voter approval. Required Do you think the actions of the politicians and the bankers in this situation are ethical? In terms of risk, how do the tax-exempt securities used to pay for the building compared to a conventional municipal bond issued by Traverse County?

1. Yes. The actions of the politicians and the bankers in the above case are ethical. While there are no ethical issues regarding their actions, there should however be a standard procedure and provision that would be included in the set rules for the country which will give directions on where to borrow, how to borrow and necessary documentations for future reference.

The options available could require voting in a locality while voting might not be required in the other locality which are dependent on the urgency of the situation and how the current state of indecision would eventually be.

As in the above scenario, the country may however choose whichever option that is suitable under the current situation inoder to meet up with timeline. In as much as voting will not be held in the other municipal hence requires no voters approval, the process will be straight through but not convincing.

2. With regards to using the tax exempt securities to pay for the building, such tax exempt is the same for most municipal bonds. However, the tax exempt securities are more riskier when compared to a conventional municipal bond issued by Traverse country. Moreover, since the lease payments are not binding obligations on the country, there maybe no security available to investors in these securities.