Diversity and Default Risks of Municipal Bonds

Robert Doty

Municipal Finance Journal, 2013, vol. 34, issue 2, 55 - 87

Abstract: This paper identifies important distinctions among different types of municipal debt, highlighting the difference between general fund securities—backed only by the spending power of the municipalities’ general fund—and general obligation (GO) securities. The author highlights the importance, in evaluating municipal bonds, of considering whether state law permits local governments to file for bankruptcy and whether state law gives general obligation bondholders the protection of a statutory lien if the local governments attempt to fi le under Chapter 9. It will be necessary to monitor the July 2013 Detroit bankruptcy closely to determine the long-term prospects for general obligation bonds not secured by statutory liens in states permitting local bankruptcy.

Date: 2013
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