ShmoopTube

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finance a la shmoop. what are general obligation, revenue and double-barreled

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bonds? well they're all flavors of muni bonds and they refer to how the promise

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to pay is backed up by the city issuing the bonds, you know to raise money. ever [ ice cream flavors in a case]

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been to a town hall meeting? well they usually have lots of retired people

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attending and lousy coffee a lot of blue hair rinses and dentures or something

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like that, and yet municipalities are the backbone infrastructure of our country

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they build parks and buildings and sewers and garbage collection systems

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and so on. in other words the things that make us go or you know deal with us [garbage truck and bathroom pictured]

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after we go. boiling it down there are really only two flavors of muni bonds-

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general obligation bonds these things a municipal bond where interest payments

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and principle repayment are back with will pay the creditor the issuing

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municipality, and revenue bonds to whom belong on the pleasures of

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revenue from the amount borrowed that. all right well the state or local issuer

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assures repayment through Full Faith and Credit, but there's a huge difference [bond pictured]

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between these two types of bonds .let's think about how this works on a national

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level with Treasuries. Full Faith and Credit means that the US government

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unconditionally promises to pay all interest in principle even if it has to

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run the process 24 by 7 to print enough money to do so. so that's at the federal

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level for Treasuries. like t bonds t-bills T notes that kind of stuff.

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municipalities work different though because they're just local. they can't [t-bonds, bills and notes on a table]

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print money like you have any Los Angeles dollars handy with you? yeah

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they'll make a nice fire someday. ok so think about Munis as a little bit

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different here. all right. so let's think about general obligation bonds. these are

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general obligations of the city to pay interest in principal from taxes that

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the issuer can levy on its citizens, that's its local taxes on its local

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citizens, and they get a piece of income tax property tax sales tax sin tax you [check out scanner adds taxes]

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know cigarettes and booze. if there's a way to extract a tithe a municipality

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well they actually might try. breathing tacks what do you think? well

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The Full Faith and Credit is the issuer's unconditional promise to pay

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the interest and the principal unless you know they can't generate enough tax

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revenue to do so or even go bankrupt. and in fact that bizarro land phenomenon is

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starting to happen more and more as cities go bankrupt all over the country [map of US- bankrupt cities marked]

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or at least they're starting to. anyway since general obligation bonds are

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backed by The Full Faith and Credit of the city , those responsible for the full

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faith in such credit must approve their issuance, and who might those be?

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well the citizens of the locality that's issuing them, that would be you. you

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people you live there you have to approve the issuance of a general

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obligation bond because it affects you. okay so that means your whole city sits

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behind a general obligation. in a revenue bond things are different. revenue bonds [city shown with networking lines showing connections]

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are more risky because they're backed up only by the revenues of a given project.

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right they don't offer Full Faith and Credit comfort .payment on these bonds

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comes only from the revenue generated from what the bonds were used to create.

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bonds to build a toll bridge are a good example here. the issuer can estimate

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fairly accurately the revenue that will be generated from the tolls you know

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based on how much traffic and five bucks every time you drive across the bridge,

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and then it's up to the investor to decide if that revenue will be

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sufficient to service the debt on the bond .okay got that ? so that's a revenue [woman frowns, man smiles]

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bond riskier then a general obligation bonds. it's backed up by only one thing. the

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bridge fails well you're out of luck. okay moving. on a hybrid mutt formed from both

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of these concepts is a double-barreled bond ,which is backed by both taxes and

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revenues .think of a County Beach that charges admission. got it? so it's gonna

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have a general obligation of the coastline and everything around it but

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generally speaking paying back the interest is supposed to come from [coastline pictured]

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charging you that 20 bucks it takes to park there all day, and you come back to

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a hot car that burns your well nevermind. all right so quite a trio here: general

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obligation bonds pretty safe backed by the whole city revenue bonds backed by a

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one thing like that toll bridge double-barreled bonds that are

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kind of backed by both. yeah. so they're quite a trio. but if they're the Destiny's [bonds listed from safest to riskiest]

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Child of muni bonds. well which one is queen bee?

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