Table of Contents
Municipal bonds are debt securities issued by local governments to fund public projects. They are generally classified into two main types: general obligation bonds and revenue bonds. Understanding the differences between these bonds helps investors make informed decisions.
General Obligation Bonds
General obligation bonds are backed by the full faith and credit of the issuing municipality. They are secured by the government’s taxing power, which means the issuer can raise taxes to meet debt obligations. These bonds are considered low-risk because of the strong backing of local government resources.
They are typically used to finance public infrastructure such as schools, roads, and parks. Because of their security, general obligation bonds often have lower interest rates compared to revenue bonds.
Revenue Bonds
Revenue bonds are secured by the income generated from specific projects or sources, such as toll roads, utilities, or airports. The revenue from these projects is used to pay interest and principal on the bonds.
These bonds are considered riskier than general obligation bonds because their repayment depends on the success of the project generating the revenue. If the project fails to produce sufficient income, bondholders may face difficulties in repayment.
Key Differences
- Security: General obligation bonds are backed by taxing power; revenue bonds are backed by project income.
- Risk: General obligation bonds are generally safer; revenue bonds carry higher risk.
- Interest Rates: GOs typically have lower rates; revenue bonds may have higher rates due to increased risk.