Understand Double-Barreled Bonds: Key Features and Security

Introduction to Double-Barreled Bonds

Double-barreled bonds are a unique form of municipal bond that incorporate the qualities of both general obligation (GO) and revenue bonds. They are typically secured, initially, by revenues from a particular project, such as a toll road or bridge, but, if those revenues are insufficient, the bonds are backed by tax revenues.

This article explores the structure and benefits of double-barreled bonds, analyzes their risk profiles, and discusses their security mechanisms. Key concepts are underlined with examples and diagrams to solidify understanding. At the end, you’ll find a glossary of related terms, additional resources for deep diving, an extensive quiz section with explanations, and a summary to wrap it all up.

Structure of Double-Barreled Bonds

1. Combination of GO and Revenue Bonds

Double-barreled bonds differ from traditional bonds as they blend characteristics of two distinct types of municipal bonds:

• General Obligation Bonds (GO): These bonds are backed by the full faith, credit, and taxing power of the issuing municipality without any limitation as to the source. This makes them widely regarded as secure investments.

• Revenue Bonds: These are supported solely by applicable project and facility revenue generation and are not backed by the issuing government’s credit.

Double-barreled bonds leverage the secure reputation of GOs while targeting specific projects akin to revenue bonds. When project-specific revenues fall short, municipal tax revenues serve as a safety net.

2. How They Operate

Without consistent revenues, holders of double-barreled bonds rely on supplemental tax revenues. The following Mermaid diagram illustrates the flow of revenue and backup mechanisms:

    graph TD;
	    A[Project Revenue] -->|Sufficient| B[Bondholder Payment];
	    A -->|Insufficient| C[Tax Revenue];
	    C --> D(Bondholder Payment);

Risk and Security

Advantages of Double-Barreled Bonds

• Greater Security: The bonds provide a safety net since both dedicated project revenue streams and tax backing are involved.

• Higher Marketability: The dual source of repayment might make these as appealing as GO bonds but with possibly slightly higher yields associated with revenue dependence.

• Enhanced Credit Rating: Municipal issuers may obtain better credit ratings compared to stand-alone revenue bonds.

Risk Assessment

Investors should evaluate the potential insufficiency of project revenues, overall economic stability, and the issuing municipality’s commitment to backing these bonds with tax revenues.

Glossary of Related Terms

• General Obligation Bonds (GO): Bonds backed by the full faith and credit of the issuing entity.
• Revenue Bonds: Bonds supported by income generated from specific projects.
• Municipal Bonds: Debt securities issued by governmental entities to fund public projects.
• Credit Rating: An evaluation of the credit risk of a prospective debtor.

Additional Resources

• FINRA Series 7 Exam Details
• Investopedia: Understanding Municipal Bonds
• SEC’s Investor Bulletin: Municipal Bonds

Quizzes

Test your understanding of double-barreled bonds with these Series 7 exam preparation quizzes:

Summary

Double-barreled bonds provide municipalities a novel, secured option for financing projects by combining aspects of both general obligation and revenue bonds. They serve as an attractive choice for investors looking for both yield and security through the backing of project revenues and tax funds. Understanding the intricacies of these bonds aids potential Series 7 exam takers, ensuring they grasp vital securities concepts and can effectively assess and recommend various investment options.