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.