What are municipal GO and revenue bonds?

A municipal bond that is either backed by dedicated taxes on property or payable from general funds is a general obligation (GO) bond.  While “general obligation” can mean that the issuer has unlimited authority to tax residents in order to make payment on the bonds, some issuers or municipal authorities have limited ability or authority to levy taxes for the servicing of their GO bonds (e.g., limited-tax general obligation bonds).  Only a full-faith-and-credit bond is backed by the full faith, credit and taxing power of the issuer, with interest and principal payments raised through taxes and occasionally some user fees.

A revenue bond is a municipal bond issued by a variety of enterprises that perform a public function, such as electric utilities, toll roads, airports and universities, with interest and principal being paid out of the revenues generated by the project itself or by certain taxes, such as sales, fuel or hotel occupancy taxes.  Revenue bonds are not backed by the full faith and credit of the issuing municipality, making them less secure but paying a higher rate of interest (yield) than equivalent general obligation bonds of the same maturity.  Revenue bonds often call for the establishment of a sinking fund, the subordination of any future debt related to the project, and specify that the bondholders have recourse to the collateral in case of the project’s default.

Although US municipal bonds are not subject to US federal laws, revenue bonds are commonly issued under indentures as reassurance for investors.  The indenture specifies the issuer’s legal obligations and provides for the appointment of a bond trustee.  A bond trustee, as agent for all holders of the bond, represents the interests of the bond investors in all legal matters and has the responsibility of ensuring the issuer’s fulfillment of the bond indenture’s terms and conditions.