Revenue Bonds Credit Risk

Credit risk or default risk is the risk that interest and or principal on the securities will not be paid on time and in full.

Revenue bonds credit risk. General obligation municipal bonds. Revenue bonds are generally of higher risk than general obligation bonds and as a result they typically offer higher yields. Traditionally it refers to the risk that a lender may not receive the. Since revenue bonds are used for long term projects the bonds feature long maturities.

If a revenue bondholder does not have insurance his bonds almost always become worthless. Credit risk is the possibility of a loss resulting from a borrower s failure to repay a loan or meet contractual obligations. Unlike a general obligation bond where a municipality backs the bonds with its full faith revenue collection powers and credit an issuer who defaults on a revenue bond has no obligation to redeem the bonds at a future date or to liquidate its assets in order to compensate bondholders according to public bonds. Generally the maturity dates of the bonds often range from 20 to 30 years.

Let s look at each of them in detail. While a revenue bond is backed by a specific revenue stream holders of go bonds are relying on the full faith and credit of the issuing municipality. You should be aware that because credit ratings may change over time the credit rating found on the official statement may not be the credit rating of the municipal bonds if you purchase them on a subsequent date. Revenue bonds therefore typically offer higher interest rates to help compensate.

The credit risk can arise in three forms namely default risk credit spread risk and downgrade risk. These are backed by the full faith and credit of the issuer including the power of the municipality to tax its citizens. Credit ratings are assessments of municipal bonds credit risk at a particular point in time. Investors need to know who is responsible for repayment of the securities and the financial condition of that entity to assess the credit risk and decide whether to purchase the securities.

Essential services bonds within the revenue bond category there are also essential services revenue bonds which include projects related to water sewer and power systems. In addition they come with a face value par value par value is the nominal or face value of a bond or stock or coupon as indicated on a bond or stock certificate. The broadest and often most secure type of municipal bonds are known as general obligation bonds.