Double-Barreled Bond
What Is a Double-Barreled Bond?
A double-barreled bond is a municipal bond in which the interest and principal payments are pledged by two distinct elements — the revenue from a defined project and the issuer and its taxing power. If the project cash flows fall short, the issuer covers the payments vowed to the muni bond's lenders and investors. Double-barreled bonds are sometimes alluded to as combination bonds.
How Double-Barreled Bonds Work
A bond is a debt instrument issued by a corporation or government to raise funds. Bonds are purchased by investors since they regularly offer a yield or interest rate to be paid at the bond's expiration date — called the maturity date. The interest rate that bonds pay is called the coupon rate.
Bonds are sold at a purchase price — called the face value — and at maturity, an investor recovers the bond for the original investment amount with any amount over the face value being the interest gain. A few bonds offer variable or fixed interest payments made by the issuer by which the interest is paid at different times consistently.
It's important to note that the principal amount — the original purchase amount — is possibly returned assuming the bond is held to maturity. In the event that the bond is sold before maturity in the secondary bond market, the investor could have a gain or loss relying upon the original purchase price (face value) and the sale price.
Municipal Bonds
Both federal and state governments issue bonds to borrow money. Municipal bonds are bonds issued by a state, municipality, or province to fund-raise for capital projects, like infrastructure development, schools, and public structures. Investors anticipate an opportune and periodic stream of interest income on these bonds and, upon maturity, repayment of their principal or original amount invested. Interest payments and principal repayments might be produced using the responsible entity (general obligation bond) or from a single revenue source (revenue bond).
Municipal bonds are basically loans from investors to the nearby government and are regularly exempt from federal taxes as well as most state taxes.
General Obligation Bond
A general obligation bond has its debt obligations produced using the general funds of the municipal issuer. These bonds are backed by the full faith and credit of the issuer, and may have the full authority to increase taxes to meet its payment obligations.
Revenue Bond
A revenue bond is a muni bond that is backed by the revenues generated from a specific project or source. Commonly, when a revenue bond is issued to fund a project, the municipality doesn't need to pay investors in the event that the revenue from the project doesn't cover the bond payments or obligations. In the event that municipalities issue debt for the benefit of private or non-benefit organizations through bonds, for example, private activity bonds (PAB) or conduit bonds, the underlying borrowers consent to repay the issuer. The issuer, thus, pays the interest and principal on the securities solely from the revenue stream of the projects embraced by the borrowers.
Double-Barreled Bond
At the point when interest and principal payments are produced using a combination of revenue and general obligation, the bond is alluded to as a double-barreled bond. A double-barreled bond, as determined in the trust indenture, is a municipal bond secured by both a defined source of revenue and the full faith and credit or taxing power of the governmental body. In effect, this combination bond conveys both a revenue and general obligation pledge. On the off chance that the project doesn't generate sufficient revenue to satisfy the interest payments to investors, the municipality will make the payments rather from its general funds.
Benefits of Double-Barreled Bonds
A double-barreled bond helps bondholders by diminishing their default risk on the bond. Default is the point at which an issuer can't make the interest or principal payments. Since the bond payments are backed by a revenue source and guaranteed by the municipal government, bondholders can reduce their risk of losing their investment.
Nonetheless, that safety can include some major disadvantages, as a lower interest rate. The guaranteed payment from two sources assists the municipal issuer with diminishing its cost of borrowing by offering lower interest rates. Ordinarily, in the event that there's a reduced risk of holding the bonds, investors will acknowledge a lower yield versus different bonds secured by just a single source.
Illustration of a Double-Barreled Bond
We should expect a nearby city issues a double-barreled muni bond to raise funds for another toll road sidestep. If the cash flows from the tolls can't cover the interest and principal payments (debt service), the shortage would be covered by the responsible city from its general fund. These bonds are, hence, payable with the toll revenue stream, which is the main level of security and guaranteed by the full faith and credit of the responsible city, which is the second level of security.
Features
- A double-barreled bond assists bondholders with decreasing the bond's default risk, yet that safety includes some significant pitfalls, as a lower interest rate.
- A double-barreled bond is a municipal bond by which the interest and principal payments are pledged or backed by two distinct substances.
- In the event that the project cash flows fall short, the issuer covers the payments vowed to the muni bond's lenders and investors.
- A double-barreled bond is backed by the revenue generated from the project the bond is funding as well as the nearby government.
