The following information pertains to a city government. a) The city (1) purchased a 3-year, 7...

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The following information pertains to a city government. a) Thecity (1) purchased a 3-year, 7 percent U.S. Treasury note (2) usedthe note to enter into a 90-day short-term loan transaction thatincorporated an interest rate of 6 percent and (3) used theproceeds from the short-term loan transaction to purchase another3-year 7 percent U.S. Treasury note. What are the benefits andrisks of the city’s investment practices? b) In 2015 the cityconstructed a new highway at a cost of $120 million. In the yearsfollowing 2015, the city did not record a depreciation charge onthe highway – not even in its government-wide statements. Can theomission of the depreciation charge be justified under GASBstandards? Explain.

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a The benefits are 1 It results in 1 percent profit for every pair of buysell 2 Once the last pair of arbitrage is done the princpal amount is still with the arbitrager Which will otherwise not be the case if it were to be Invested in the 7 Note alone This Principal could further be invested elsewhere to gain interest This is an extra income too 3 Arbitrage in practice See Answer

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