What is the difference between a tax-backed bond and a revenue bond?

What will be an ideal response?

The two basic security structures are tax-backed debt and revenue bonds. The former are secured by the issuer's generally taxing power. Revenue bonds are used to finance specific projects and are dependent on revenues from those projects to satisfy the obligations. Thus, the difference between tax-backed bonds and revenue bonds involve how the bonds are secured. More details are supplied below.

There are basically two different types of municipal bond security structures: tax-backed bonds and revenue bonds. Tax-backed debt obligations are instruments issued by states, counties, special districts, cities, towns, and school districts that are secured by some form of tax revenue. Tax-backed debt includes general obligation debt, appropriation-backed obligations, and debt obligations supported by public credit enhancement programs.

The broadest type of tax-backed debt is general obligation debt. There are two types of general obligation pledges: unlimited and limited. An unlimited tax general obligation debt is the stronger form of general obligation pledge because it is secured by the issuer's unlimited taxing power. The tax revenue sources include corporate and individual income taxes, sales taxes, and property taxes. Unlimited tax general obligation debt is said to be secured by the full faith and credit of the issuer.

The second basic type of security structure is found in a revenue bond. Such bonds are issued for either project or enterprise financings in which the bond issuers pledge to the bondholders the revenues generated by the operating projects financed. For a revenue bond, the revenue of the enterprise is pledged to service the debt of the issue. There are various restrictive covenants included in the trust indenture for a revenue bond to protect the bondholders. A rate, or user charge, covenant dictates how charges will be set on the product or service sold by the enterprise.