On what basis is borrowing capacity assessed?

On what basis is borrowing capacity assessed?

• A. Gross Debt
• B. Public Debt
• C. Net Debt
• D. Current Liabilities

Answer: (C)

Borrowing capacity is primarily assessed based on net debt. Net debt is calculated by taking the gross debt of a municipality and deducting its self-supporting debt, which includes various forms of revenue that can be used to pay off obligations. This gives a clearer view of the actual liabilities that a municipality bears in relation to its financial resources and ability to service debt. In assessing a municipality's financial health, net debt provides insights into how much debt is actually impacting the municipality's fiscal position, taking into consideration the assets or revenues that offset some of this debt. This is crucial for bond rating agencies and investors, as it reflects the true financial obligation of the municipality, influencing decisions regarding future borrowing and investments. Other methods of evaluating debt, such as focusing solely on gross debt or public debt, might not accurately capture the municipality's financial leverage or how much debt-related risk it poses. Similarly, current liabilities often relate to short-term financial positions and obligations, rather than the overall borrowing capacity. Therefore, net debt serves as the most critical measure when determining a municipality's borrowing capacity.

Borrowing capacity is primarily assessed based on net debt. Net debt is calculated by taking the gross debt of a municipality and deducting its self-supporting debt, which includes various forms of revenue that can be used to pay off obligations. This gives a clearer view of the actual liabilities that a municipality bears in relation to its financial resources and ability to service debt.

In assessing a municipality's financial health, net debt provides insights into how much debt is actually impacting the municipality's fiscal position, taking into consideration the assets or revenues that offset some of this debt. This is crucial for bond rating agencies and investors, as it reflects the true financial obligation of the municipality, influencing decisions regarding future borrowing and investments.

Other methods of evaluating debt, such as focusing solely on gross debt or public debt, might not accurately capture the municipality's financial leverage or how much debt-related risk it poses. Similarly, current liabilities often relate to short-term financial positions and obligations, rather than the overall borrowing capacity. Therefore, net debt serves as the most critical measure when determining a municipality's borrowing capacity.