Definition
GO Bonds are backed by the “full faith and credit” of the issuing municipality. This means repayment is guaranteed by the government’s power to tax residents or raise revenue.
How It Works
- Issuer pledges its taxing authority (e.g., property tax, sales tax) to repay bondholders.
- These are considered the safest type of municipal bonds.
Example
A city issues a 20-year GO bond to build public schools.
- Coupon: 3.5% per year
- Repayment: Funded by city property tax revenues
Used by: Investors seeking very low-risk, tax-exempt income.
Definition
Revenue bonds are backed by revenues generated from a specific project rather than tax revenues. They’re riskier than GO bonds but often offer higher yields.
How It Works
- Repayment depends on the income generated by the project (e.g., toll roads, water utilities, airports).
- If the project underperforms, investors bear more risk.
Example
A state issues a 30-year revenue bond to fund a toll highway.
- Coupon: 4.25%
- Repayment: Tolls collected from highway users
Used by: Investors willing to accept slightly more risk for higher tax-free returns.
Definition
Issued for specific projects or purposes, often backed by dedicated revenue streams (like hotel taxes, parking fees, or stadium revenues).
Example
A city issues special purpose bonds to build a sports stadium.
- Coupon: 4%
- Repayment: Ticket surcharges and parking revenue
Used by: Investors targeting specific municipal projects.
Definition
- Tax-Free Munis: Interest income is exempt from federal tax (and often state/local if you live in the issuing state).
- Taxable Munis: Issued for projects not eligible for tax-exempt status (e.g., pension funding, economic development).
Example
- Tax-free GO bond: 3% yield (effective after-tax return might be ~4.5% if you’re in a high tax bracket)
- Taxable muni: 5% yield (but taxed like regular income)
Used by: High-income investors in high-tax jurisdictions.
Definition
Agency bonds are issued by U.S. federal agencies or government-sponsored enterprises (GSEs) to support public policy goals — primarily housing and mortgage markets. They are not municipal bonds, but they sit between sovereign and municipal in risk terms.
Examples
- Fannie Mae (FNMA): Issues bonds to finance home loans bought from lenders.
- Freddie Mac (FHLMC): Similar to Fannie Mae, supports mortgage liquidity.
- Ginnie Mae (GNMA): Fully backed by the U.S. government, guarantees mortgage-backed securities.
Used by: Institutional investors for very high-quality, near-sovereign fixed income exposure.
Definition
A REMIC is a structured vehicle that issues mortgage-backed securities (MBS) — bonds backed by pools of mortgage loans. Many REMIC securities are issued by Fannie Mae or Freddie Mac and are treated as pass-through securities.
Example
- A pool of residential mortgages is packaged into a REMIC.
- Investors receive monthly interest and principal payments as homeowners repay their loans.
Used by: Fixed income investors seeking mortgage exposure with strong credit backing.
Comparison Table – Municipal & Agency Bonds
| Type | Backed By | Risk | Tax Status | Key Use |
|---|---|---|---|---|
| GO Bonds | Taxing power of issuer | Low | Usually tax-free | Safe, stable income |
| Revenue Bonds | Project revenue | Medium | Usually tax-free | Higher yield |
| Special Purpose Bonds | Specific revenue streams | Medium | Usually tax-free | Targeted projects |
| Taxable Munis | General or project revenue | Medium | Taxable | Broader project funding |
| Agency Bonds (Fannie/Freddie/Ginnie) | GSE credit / U.S. backing | Very low | Taxable | Mortgage market support |
| REMIC / MBS | Mortgage payments | Medium | Taxable | Mortgage-backed cash flows |