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Classifying Municipal Bonds

Introduction

There are two main types of municipal bonds: General Obligation bonds and Revenue Municipal bonds. General Obligation bonds (GOs) are backed by the “full faith and credit” of a taxing authority which if necessary pledges to raise taxes with its unlimited taxation power in order to pay its outstanding GO debt when due. Revenue Municipal bonds; on the other hand, are used to finance either a municipal facility or a project such as a department of water and power or a toll road; and hence, have a dedicated stream of revenues from these facilities for the payment of interest and principal to the bond holders. In this case, if the revenue stream is not sufficient to pay the bonds, it is likely that the issuer will default on its payment. The issuer is not obligated to use other revenue sources to pay the bondholders.

Double-Barreled Municipal Bonds

These bonds pay interest and principal first from a specific flow of a revenue stream and second from the general obligation and unlimited taxation power of a municipality. On the other hand, limited tax municipal bonds are secured by limited revenue sources and taxes that are restricted to certain maximum rates.
In addition, there are various other municipals such as pre-refunded and certificate of participation bonds. Pre-refunded municipal bonds mean that bonds are normally escrowed with 100% U.S. Treasury bonds guaranteeing interest and principal on the bonds at maturity. Certificate of participation bonds provide the bondholders of the certificates a participation right in the revenue stream generated from a facility or a project.

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