Quick Answer
General obligation (GO) bonds are backed by taxing power and need voter approval; revenue bonds are backed by project income and do not. Interest is federally tax-exempt, and in-state bonds are triple tax-free. The taxable equivalent yield formula, the net-vs-gross pledge, and syndicate order priority are the heaviest-tested pieces.
The whole unit on one sheet: bond types, tax rules, the math, primary financing, and the dealer-conduct rules the exam loves.
How Do GO and Revenue Bonds Differ?
| Feature | GO Bonds | Revenue Bonds |
|---|---|---|
| Backing | Full faith, credit, taxing power (ad valorem property taxes) | Revenue from a specific project or facility |
| Voter approval | Required | Not required |
| Risk level | Generally lower | Generally higher |
| Analysis tool | Debt ratios (net debt per capita, net debt to assessed valuation) | Feasibility study, debt service coverage ratio (DSCR) |
| Key concern | Overlapping debt, tax base, population trends | Rate covenant, additional bonds test (ABT), flow of funds |
- Net debt = total debt minus self-supporting debt (paid by user fees, not taxes).
- DSCR = net revenue / annual debt service; adequate coverage is 2.0x, or 1.25x for utility revenue bonds (stable demand).
What Are the Muni Note and Structure Types?
- Short-term notes bridge cash-flow timing: tax anticipation notes (TANs) from taxes, revenue anticipation notes (RANs) from other revenue, bond anticipation notes (BANs) from future bond proceeds.
- Double-barreled = two sources (revenue plus taxing power); safer than pure GO or revenue.
- Moral obligation = non-binding legislative commitment, not legal; riskier than a GO.
- Advance refunded (pre-refunded) bonds are defeased with Treasuries in escrow; typically AAA.
Which One-Liners Win Points?
- In-state muni interest = triple tax-free; out-of-state = federal exempt but state-taxable.
- U.S. territory bonds (Puerto Rico, Guam, USVI) are triple tax-exempt for investors in ALL states.
- Original issue discount (OID) accretes tax-exempt; market discount accretes as taxable ordinary income.
- Always quote the LOWER yield on a callable bond (the worst case for the investor).
- Munis are exempt from SEC registration but NOT from anti-fraud rules.
Which Numbers Matter Most?
| Item | Value |
|---|---|
| Par value / minimum denomination | $1,000 par per bond (same as corporates); $5,000 minimum denomination |
| Day count for accrued interest | 30/360 (each month 30 days, year 360) |
| Regular-way settlement | T+1 |
| Trade reporting to RTRS | within 15 minutes of execution |
| Material event notice to EMMA | within 10 business days |
| Current vs. advance refunding line | within 90 days of call date = current |
| Rate covenant minimum (any project type) | commonly 1.25x |
| Analytically adequate DSCR | 2.0x (1.25x for utility revenue bonds) |
| Bank-qualified issuer cap | no more than $10 million tax-exempt per calendar year |
| Bank-qualified carrying-cost deduction | 80% |
| Municipal-disclosure rule threshold | offerings of $1 million or more |
| Syndicate account settlement | within 30 calendar days after delivery |
| Good faith deposit (syndicate member) | typically 1-2% of par participation |
How Do You Calculate Taxable Equivalent Yield?
- TEY = tax-exempt yield / (1 - marginal tax rate). Most-tested muni math.
- Common trap: multiplying by the tax rate instead of dividing by (1 - rate).
- Example: a 4% muni for a 32% bracket investor = 4% / 0.68 = 5.88%.
- In-state (triple tax-free): combine federal and state rates (e.g., 32% + 6% = 38%, so 4% / 0.62 = 6.45%). Out-of-state uses the federal rate only.
How Does Primary Financing and Syndication Work?
- GO bonds = competitive sale (lowest true interest cost (TIC) or net interest cost (NIC) wins); revenue bonds = negotiated.
- TIC accounts for time value of money; NIC does not.
- Eastern (undivided) account = shared liability for all unsold bonds; Western (divided) = individual liability only. Eastern carries more risk.
- Selling concession is always the largest spread component. Total takedown = underwriting fee + selling concession (excludes the management fee). A non-member dealer earns only the reallowance.
What Is the Memory Aid for GO vs. Revenue Pledge and Order Priority?
- Gross = bondholders Go first. Net = bondholders are Next (after operations and maintenance); net is the default.
- "Please Get Dessert Made" = Pre-sale, Group, Designated, Member (conventional; only customer-over-member is fixed by rule).
Which Gotchas Trip Students Up?
- The legal opinion covers legality and tax status only, NOT creditworthiness. Ex-legal bonds trade but are less marketable.
- A limited tax GO caps the tax rate; an unlimited tax GO does not. "Unlimited" refers to taxing power, not borrowing.
- Premium amortization on tax-exempt munis is NOT deductible. At maturity, basis equals par, so no gain or loss.
- AMT applies to private activity bonds, NOT to governmental or 501(c)(3) bonds.
- The official statement (OS) goes to EMMA, not the SEC. "Access equals delivery" means notifying the buyer it's on EMMA satisfies the rule; the deadline is settlement.
- Non-qualified withdrawals from 529 and Achieving a Better Life Experience (ABLE) accounts trigger income tax PLUS a 10% penalty on earnings.
One-Breath Recap
General obligation bonds lean on taxing power and a voter referendum, while revenue bonds lean on project income, a feasibility study, and covenants like the rate covenant, with the net pledge assumed unless a gross pledge is stated. Interest is federally tax-exempt and triple tax-free in-state, so run every comparison through the taxable equivalent yield formula, divide by one minus the tax rate, and never treat capital gains or market discount as exempt. Lock in the numbers, know that the MSRB writes and FINRA and the SEC enforce, and the muni questions answer themselves.
Need more than the recap? Read the full Municipal Securities unit.