Double Barreled Bond
Bear with us. We'll get there.
There are really only two flavors of muni bonds:
General Obligation Bonds…and Revenue Bonds.
The state or local issuer assures repayment through "full faith and credit," but there is a huge difference between them. With Treasuries, full faith and credit means that the U.S. government unconditionally promises to pay all interest and principal, even if it has run the presses 24/7 to print enough money to do so.
General Obligation Bonds, on the other hand, pay interest and principal from taxes that the issuer can levy on its citizens. Income tax, property tax, sales tax, sin tax (cigarettes and booze are examples of these). If there's a way to extract a tithe, a municipality might actually try it.
The "full faith and credit" is the issuer's unconditional promise to pay…unless, um, they can't generate enough tax revenue to do so…or even go bankrupt. And, in fact, that bizarroland phenomenon is starting to happen more and more all over the country.
Anyway, since GO bonds are backed by the full faith and credit, those responsible for the full faith in such credit must approve their issuance.
And who might those be? The citizens of the locality that is issuing them. That would be you.
In contrast, Revenue bonds do not offer any full faith and credit comfort. Payment on these bonds comes from the revenue generated from what the bonds were used to create. Bonds to build a toll bridge are a good example. The issuer can estimate fairly accurately the revenue that will be generated from the tolls, and then it's up to the investor to decide if that revenue will be sufficient to service the debt.
A hybrid mutt formed from both of these concepts is a double-barreled bond (there we go), which is backed by both taxes and revenues. Think of a county beach that charges admission.
Related or Semi-related Video
Finance: What are General Obligation, Re...88 Views
finance a la shmoop. what are general obligation, revenue and double-barreled
bonds? well they're all flavors of muni bonds and they refer to how the promise
to pay is backed up by the city issuing the bonds, you know to raise money. ever [ ice cream flavors in a case]
been to a town hall meeting? well they usually have lots of retired people
attending and lousy coffee a lot of blue hair rinses and dentures or something
like that, and yet municipalities are the backbone infrastructure of our country
they build parks and buildings and sewers and garbage collection systems
and so on. in other words the things that make us go or you know deal with us [garbage truck and bathroom pictured]
after we go. boiling it down there are really only two flavors of muni bonds-
general obligation bonds these things a municipal bond where interest payments
and principle repayment are back with will pay the creditor the issuing
municipality, and revenue bonds to whom belong on the pleasures of
revenue from the amount borrowed that. all right well the state or local issuer
assures repayment through Full Faith and Credit, but there's a huge difference [bond pictured]
between these two types of bonds .let's think about how this works on a national
level with Treasuries. Full Faith and Credit means that the US government
unconditionally promises to pay all interest in principle even if it has to
run the process 24 by 7 to print enough money to do so. so that's at the federal
level for Treasuries. like t bonds t-bills T notes that kind of stuff.
municipalities work different though because they're just local. they can't [t-bonds, bills and notes on a table]
print money like you have any Los Angeles dollars handy with you? yeah
they'll make a nice fire someday. ok so think about Munis as a little bit
different here. all right. so let's think about general obligation bonds. these are
general obligations of the city to pay interest in principal from taxes that
the issuer can levy on its citizens, that's its local taxes on its local
citizens, and they get a piece of income tax property tax sales tax sin tax you [check out scanner adds taxes]
know cigarettes and booze. if there's a way to extract a tithe a municipality
well they actually might try. breathing tacks what do you think? well
The Full Faith and Credit is the issuer's unconditional promise to pay
the interest and the principal unless you know they can't generate enough tax
revenue to do so or even go bankrupt. and in fact that bizarro land phenomenon is
starting to happen more and more as cities go bankrupt all over the country [map of US- bankrupt cities marked]
or at least they're starting to. anyway since general obligation bonds are
backed by The Full Faith and Credit of the city , those responsible for the full
faith in such credit must approve their issuance, and who might those be?
well the citizens of the locality that's issuing them, that would be you. you
people you live there you have to approve the issuance of a general
obligation bond because it affects you. okay so that means your whole city sits
behind a general obligation. in a revenue bond things are different. revenue bonds [city shown with networking lines showing connections]
are more risky because they're backed up only by the revenues of a given project.
right they don't offer Full Faith and Credit comfort .payment on these bonds
comes only from the revenue generated from what the bonds were used to create.
bonds to build a toll bridge are a good example here. the issuer can estimate
fairly accurately the revenue that will be generated from the tolls you know
based on how much traffic and five bucks every time you drive across the bridge,
and then it's up to the investor to decide if that revenue will be
sufficient to service the debt on the bond .okay got that ? so that's a revenue [woman frowns, man smiles]
bond riskier then a general obligation bonds. it's backed up by only one thing. the
bridge fails well you're out of luck. okay moving. on a hybrid mutt formed from both
of these concepts is a double-barreled bond ,which is backed by both taxes and
revenues .think of a County Beach that charges admission. got it? so it's gonna
have a general obligation of the coastline and everything around it but
generally speaking paying back the interest is supposed to come from [coastline pictured]
charging you that 20 bucks it takes to park there all day, and you come back to
a hot car that burns your well nevermind. all right so quite a trio here: general
obligation bonds pretty safe backed by the whole city revenue bonds backed by a
one thing like that toll bridge double-barreled bonds that are
kind of backed by both. yeah. so they're quite a trio. but if they're the Destiny's [bonds listed from safest to riskiest]
Child of muni bonds. well which one is queen bee?