Confused by bonds? Want to know more about Neighborly? Read on.
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A general obligation bond typically refers to a bond issued by a state or local government in which interest is paid and principal is repaid from the issuer’s general funds. Most general obligation bonds are said to entail the "full faith and credit" (and in many cases the taxing power) of the issuer.
A revenue bond typically refers to a bond in which interest is paid and principal is repaid from a specific source of revenue pledged to the bond. For example, a bond issued by a municipal water and sewer authority would typically involve revenues obtained through local water and sewer assessments. In another example, a government might issue bonds on behalf of a private entity or 501c3. In this case, interest is paid and principal is repaid exclusively from revenues pledged by the entity receiving financing.
The city of Neighborly, CA, wants to raise $5 million to convert city hall's power supply to solar energy. To raise the money it decides to sell $5 million of 5-year bonds, priced at $1000 each. The Neighborly Solar bonds pay 5% interest, so investors receive $50 per year for the next five years.Erica buys a Neighborly Solar bond for $1000, its face value. Erica receives $50 interest per year. Erica's yield is 50 / 1000 = 5%.Meanwhile, Eduardo buys a Neighborly Solar bond from a broker, but is charged $1100 for it. Like Erica and all other investors, he receives $50 interest per year. Eduardo's yield is 50 / 1100 = 4.5%.
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