Syndicate
Municipal Bonds
Municipal bonds are bonds issued by the state, county, city or other political entities. The paid interests the largest amount of issuers of municipal bonds are exempt of federal and state taxes or even local taxes if bonds have been issued in the state or local tax area. This exemption from federal taxes is the most important feature of municipal bonds.
Municipal bonds that are issued and backed up by the full faith and credit of states and municipalities are called general obligation bonds. The general-obligation bonds are municipal bonds in which interests and the principal are backed by the financial resources and taxing power of the issuing authority.
In other words, paid interests to bondholders come from unlimited taxing authority, but in reality, it might not be easy to enact their unlimited taxing powers. For example, New York City defaulted on its general-obligation notes in 1975. Not al general-obligation bonds are equal. Their safety in terms of credit and default risk depends on the economic and financial strengths of the issuers.
The revenue bonds are municipal bonds whose paid interests and principal are cancelled only if the issuer can generate enough rent. These bonds are issued by entities such as hospitals, universities, airports, toll roads, and public utilities where generated incomes by these entities or of their projects are used to pay debt interests.
For example, the airport revenue bonds could generate rent based in the use of traffic in the airport, or the incomes coming from the use of airport facilities, as it would leasing a building in the terminal.
In the former case of revenue collection, bondholders should determine if there is an increasing demand as to so many passengers as to use the airport?s traffic airspace. . In the latter form of revenue collection, bondholders should determine if the lease payment will be enough to pay the debt.
Proceeds from highway revenue bonds might be used to build toll roads or bridges or to make improvements to the highway infrastructure. Bondholders have the right to claim tolls paid on these roads and bridges, but what happens to improvements and highway rapiers? Improving a highway does not generate rent.
Revenue bonds which do not support themselves have revenues earmarked to secure the debt. Some examples are gasoline taxes, license fees, and automobile registration fees.
Revenue bonds security or safeguards depends on how vital are the services these entities provide, the rent flux, if these are increasing or decreasing, and if there will be further claims because of rent before those of bondholders. The relative strength of revenue bonds issuers to generate rent and easiness with which they can cover the payment of interests determines the rating of the revenue bonds.