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Finance: What are General Obligation, Revenue and Double-barreled Bonds? 92 Views

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What are general obligation, revenue and double-barreled bonds? General obligation bonds are backed by the place that issued them. So rather than being backed by the revenue that comes from the project associated with the bond, it’s backed by the place itself. Revenue bonds, on the other hand, are backed by the revenue that comes from a specific project...usually things like roadways. Double-barreled bonds are a combination of general obligation and revenue bonds. They are very secure, because if the project doesn’t make as much as expected, the issuing place can cover obligations.

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finance a la shmoop. what are general obligation, revenue and double-barreled
00:07
bonds? well they're all flavors of muni bonds and they refer to how the promise
00:13
to pay is backed up by the city issuing the bonds, you know to raise money. ever [ ice cream flavors in a case]
00:18
been to a town hall meeting? well they usually have lots of retired people
00:20
attending and lousy coffee a lot of blue hair rinses and dentures or something

00:25
like that, and yet municipalities are the backbone infrastructure of our country
00:29
they build parks and buildings and sewers and garbage collection systems
00:33
and so on. in other words the things that make us go or you know deal with us [garbage truck and bathroom pictured]
00:38
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
00:46
and principle repayment are back with will pay the creditor the issuing
00:49
municipality, and revenue bonds to whom belong on the pleasures of
00:51
revenue from the amount borrowed that. all right well the state or local issuer
00:55
assures repayment through Full Faith and Credit, but there's a huge difference [bond pictured]
01:00
between these two types of bonds .let's think about how this works on a national
01:04
level with Treasuries. Full Faith and Credit means that the US government
01:09
unconditionally promises to pay all interest in principle even if it has to
01:12
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]
01:26
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
01:35
different here. all right. so let's think about general obligation bonds. these are
01:39
general obligations of the city to pay interest in principal from taxes that
01:43
the issuer can levy on its citizens, that's its local taxes on its local
01:49
citizens, and they get a piece of income tax property tax sales tax sin tax you [check out scanner adds taxes]
01:54
know cigarettes and booze. if there's a way to extract a tithe a municipality
01:58
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
02:06
the interest and the principal unless you know they can't generate enough tax
02:10
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]
02:19
or at least they're starting to. anyway since general obligation bonds are
02:23
backed by The Full Faith and Credit of the city , those responsible for the full
02:28
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
02:45
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]
03:24
bond riskier then a general obligation bonds. it's backed up by only one thing. the
03:29
bridge fails well you're out of luck. okay moving. on a hybrid mutt formed from both
03:33
of these concepts is a double-barreled bond ,which is backed by both taxes and
03:39
revenues .think of a County Beach that charges admission. got it? so it's gonna
03:45
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
03:56
a hot car that burns your well nevermind. all right so quite a trio here: general
04:00
obligation bonds pretty safe backed by the whole city revenue bonds backed by a
04:05
one thing like that toll bridge double-barreled bonds that are
04:08
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]
04:12
Child of muni bonds. well which one is queen bee?
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