medium · GMAT Verbal
A municipal bond issued by Rivergate County can enter default under its indenture's coverage-ratio provision only if the county's debt-service coverage ratio falls below 1.0 for two consecutive fiscal years. Rivergate's coverage ratio was 0.87 last year and was 1.04 for the current year.
Which of the following can be most properly inferred from these statements?
- Rivergate's bonds are already in default because last year's coverage ratio fell below 1.0.
- Under this provision, Rivergate cannot be in default, since the ratio wasn't below 1.0 both years.
- Rivergate's coverage ratio will necessarily climb back above 1.0 in the following fiscal year too.
- This coverage-ratio test is the only mechanism by which Rivergate's bonds could ever enter default.
- Because the ratio rose this year, Rivergate's overall fiscal condition must be improving markedly.
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