Abstract
Problem statement: There is a significant difference between the interest rates on the GO and the RV municipal bonds. We sought explanation for this difference in differences in information asymmetry between the two types of municipal bonds. GO bonds finance general municipality expenditures and repayment is from general tax revenues. RV bonds finance special projects and repayment is from cash flows of the special projects. These projects are assumed to be more asymmetric than the general municipality tax revenues. Previous studies examined this issue but did not explicitly consider the information asymmetry differences. Approach: We used issue transaction spread as a proxy for information asymmetry. Average spread for RV bonds is 1.172% while that for GO bonds is 0.892%. We controlled for external economic factors, issue and issuer features and contractual terms that might affect yield on debt. We used two-step regression analyses to explain yields on the two types of municipal bonds. Results: RV bonds cost 74 basis points more on the average than GO bonds. After controlling for external economic factors, issue and issuer features and contract terms, the difference shrank to an average of 44 basis points. Issue transaction spread, our proxy for information asymmetry and credit rating were important determinants of bond yields. Conclusion/Recommendations: Issue transaction spread, as a proxy for information asymmetry, explained differences in bond yields. Other variables that affect yield differences were credit rating, maturity, economic activities, contract terms and other issue and issuer features. Still, there remained an unexplained difference in the yields between RV and GO bonds of 44 basis points that we left for further research. This difference was inversely related to the credit rating of the bond.
Highlights
States, counties, cities, school districts and other local government units, called collectively municipalities, issue two broad categories of bonds
Based on a rich data set that combines Security’s Data Company bond issue data with demographic data of local governments and other economic variables, we find that General Obligation (GO) bonds have a higher average credit rating, lower issue costs and lower yields than RV bonds
This study analyzes the yield differences between GO and RV bonds issued by city and county governments during 1990-1999
Summary
Counties, cities, school districts and other local government units, called collectively municipalities, issue two broad categories of bonds. These are General Obligation (GO) bonds and Revenue (RV) bonds. GO bonds finance the general operation of the municipality and repayment is from the tax and other general revenues of the municipality. RV bonds are issued to finance special projects such as road and bridge construction, construction of parking lot, hospital construction and other similar development projects. These projects generate revenue and repayment of RV bonds is from such revenues of the projects. RV bonds are in a way secured by these special projects
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: American Journal of Economics and Business Administration
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
