[Series 65] 21, Municipal Bonds GO vs Revenue

0:00We are covering the critical differences between general obligation and revenue municipal bonds for the Series 65 exam. This is a topic that requires precision as the exam will test your understanding of what secures these bonds and their associated risks. Let's start with general obligation bonds or GO bonds. The key phrase for the exam is full faith and credit. This means the bond is secured by the issuing municipalities power to tax its residents. Think property taxes, also known as ad valorem taxes, sales taxes, and other general income streams. Because of this broad backing, GO bonds are considered very safe. A major test point is that the issuance of new GO bonds typically requires voter approval since taxpayer money is on the line. So if a question describes a new public school or park being funded, it's a GO bond that needed public consent. Now let's contrast this with revenue bonds.

1:00These are not backed by taxing power. Instead, they are backed solely by the revenues generated from a specific project, such as tolls from a new bridge, lending fees at an airport, or patient fees at a hospital. This makes them only as credit-worthy as the project's ability to produce income. For the Series 65 exam, if you see the term feasibility study, your mind must immediately connect it to a revenue bond. This study assesses the project's potential to generate enough income to service the debt. Unlike GOs, revenue bonds do not require voter approval and are not subject to statutory debt limits. The exam will test these distinctions through suitability questions. For a conservative client seeking maximum safety, a highly rated GO bond is a suitable recommendation. For an investor willing to take on more risk for a potentially higher yield, a revenue bond might be appropriate, but the specific project's financials must be analyzed.

2:01Now for the tax implications, a heavily tested area. The interest income from most municipal bonds is exempt from federal income tax. It is also usually exempt from state and local taxes if the investor resides in the state of issuance. A California resident buying a California GO bond receives triple tax-free income. But if that same Californian buys a New York bond, the interest is still federally tax-free, but is subject to California state income tax. Here is the most common exam trap, the alternative minimum tax or AMT. While most municipal interest is tax-free, interest from certain private activity bonds is a tax preference item and may be subject to the AMT. Private activity bonds are a type of revenue bond issued to finance projects for private entities, like a sports stadium or an airport terminal expansion for a specific corporation. If a client is subject to the AMT, you as an advisor

3:01must know that recommending a private activity bond could create a taxable event for them. To keep this straight, use this mnemonic. Geobonds mean the government has to go to the voters for approval. Revenue bonds rely on the revenue from a single project. For free practice questions, AI-powered explanations, and more exam prep tools, visit openexamprep.com. That's openexamprepalloneword.com.