Combination Bond
Government bonds can be backed in two general ways. One draws its revenue from the project that bonds are meant to finance. So if the money raised from the bonds funds the building of a toll-supported road, the cash raised from the tolls will be used to pay off the bonds.
The other option for backing government bonds comes from tax revenue. This scenario involves the whole "full faith and credit" thing. Basically, the government promises to use part of its tax revenue to pay off the bond debt.
A combination bond brings these two payment forms together. This type of debt security is backed both by revenues generated by the specific project and by tax revenue. The multiple revenue streams make the bond a safer investment. It's meant to provide double assurance that the debt will be repaid, hopefully allowing the government to offer a lower yield when it looks to bring in buyers.
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Finance: What are Bonds?393 Views
Finance a la shmoop what is a bond? well a bond is your word your promise your [Women shake hands]
handshake your John Hancock on a contracted piece of paper your mortgage
your credit card debt yeah their bonds to your "I swear I'm not a deadbeat"
declaration... that's your bond right well bonds come [Man lying on a sofa]
in many complex flavors and compositions simply put bonds are loans aka debt you
borrow money or you promise or you you bond that
you'll pay it back when you borrow money the amount you borrow is called the
principal you pay rent on that amount borrowed and that rent is called [rent appears at bank]
interest to the entity loaning you the money that interest is called yield
thank you very much for the yield like if the lender rents you a grand for a
year and you pay them a thousand 80 bucks at year-end paying back the
principal and then the rent on the money while the lender will have had a yield [Yield of lender appears]
of 8% on the grand that they loaned you so that's a bond you borrow money you
pay it back and if you don't the person who loaned you the dough well they [Person stamped with property of shmoop bank]
generally own your tuchus and yeah you know what Shakespeare said about bonds
yeah that's what he said so if you don't really know what you're doing don't do
it...
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