General Obligation and Revenue Bonds

Understanding GOs and RBs

[By Staff Writers]fp-book2

General obligation bonds are secured by the taxing authority and are therefore considered safer than other municipals. The full faith and credit of the municipality ensures prompt payment of principal and interest.

Further more, most municipal bonds, including city, county, and school district issues, are secured by a pledge of unlimited property taxes (known as ad-valorem taxes), which further secures the bonds. If taxes are not paid, the property may be sold at a tax sale, at which the bondholder has a superior position.

Revenue bonds

Revenue bonds are payable from the earnings of a revenue-generating facility, such as water, sewers, or utility systems, toll bridges, or airports. The risk, however, is that the facility will not generate income sufficient to pay the interest, and therefore the yield is somewhat higher than for a general-obligation bond.

Revenue bonds are supported only by the revenue earned, so if the project does not produce revenues sufficient to pay the interest on the bonds, then the bonds go into default. Therefore, it is important to properly evaluate the municipality’s ability to tax and/or the assumptions used to project the facility’s revenue.

Conclusion

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One Response

  1. Bond Ladders

    Any doctor can construct a portfolio with strong income that remains hedged against higher inflation. This is done by laddering a portfolio with high coupon bonds and staggered maturities.

    If inflation and interest rates rise, interest payments and maturing principal in the portfolio can be rolled into a high yielding environment. Should inflation remain in check, the long end of the ladder will provide locked-in returns at enviable rates.

    This flexibility cannot be duplicated in most packaged products sold by FAs or stock-brokers.

    Dr. David Edward Marcinko MBA CMP™
    http://www.CertifiedMedicalPlanner.com
    [Publisher-in-Chief]

    Like

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