March 2, 2010
#FRM Double Barreled Bond
What is a bond?
A bond is a fixed interest financial asset issued by governments, companies, banks, public utilities and other large entities. Bonds pay the bearer a fixed amount a specified end date. A discount bond pays the bearer only at the ending date, while a coupon bond pays the bearer a fixed amount over a specified interval as well as paying a fixed amount at the end date.
What are Double-barreled bonds?
A revenue bond that is issued by a municipal or state authority and is guaranteed by the overlying municipal or state authority is a double barreled bond. For example, if a transport authority for a state issues a bond, in the event that revenues from the transport authority are not enough to pay back the bond, the state government would use its tax revenues to make up for the interest and principal payments. So, for these bonds the cash flows are pledged by two distinct entities. The First entity is under obligation to make interest payments, whereas the other owes the principal payments. These are municipal general obligation (GO) bonds as in contrast to revenue bonds because they are backed by the issuer and its taxing authority.
A revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a concerned revenue-generating entity associated with the purpose of the bonds. Unlike Double Barreled (general obligation) bonds, only the revenues specified in the legal contract between the bond holder and bond issuer are required to be used for repayment of the principal and interest of the bonds; other revenues like tax revenues and the general credit of the issuing agency are not so encumbered. Since the security of return is not as high as that of double barreled bonds, revenue bonds generally offer a slightly higher interest rate than G.O. bonds. However, they are usually considered the second-most secure type of municipal bonds.
Any government agency or fund that is run like a business and generates operating revenues and expenses can issue revenue bonds:
Other Types of bonds:
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