States, counties and cities that seek financing for public projects may issue municipal bonds. When issuing these municipal bonds, the government is borrowing money from the public. The bondholders will be repaid the principal plus interest over a specific span of years. The two types of municipal bonds are general obligation bonds and revenue bonds. The difference between them lies in how the government issuer secures the money to repay the bondholders
General Obligation Bonds
A General Obligation Bond is secured by the full faith, credit, and taxing power of cities, states, or school districts. When a bond is issued as a General Obligation, it means that the issuer will use any and all taxing power that it possesses to make sure that the investors are paid back, including income taxes, corporate taxes, property taxes and more. If, for some reason, the issuer defaults on the bond, bondholders can take legal action, and the issuer can be ordered by the courts to raise taxes, sell assets, or find some other method of paying back its bondholders. That is why it is called a General Obligation Bond: the issuer is generally obligated.
The most common issuers of General Obligation Bonds include:
- Cities and towns
- School districts
A Revenue Bond, meanwhile, is guaranteed by the specific revenue collected by the issuer. Common issuers of Revenue Bonds include:
- Public transportation departments
- Utility companies
- Other organizations which generate income by providing a service or services to the public
Revenue bonds are offered to back a specific, revenue generating project. Unless they are backed by a separate, third party guarantee, the only revenues which must be used to pay back the bond are those specifically tied to the project in question. For example, if the MTA wants to buy new trains or buses, or improve their tracks, they issue bonds to make the investment.
Interested in Municipal Bonds?
If you are interested in finding out more about municipal bond yields, and how General Obligation Bonds and Revenue Bonds might find a place in your portfolio, contact the GMS Group today. Our municipal bond specialists will provide you with all the knowledge to help you reach your investment objectives.