What is an Authority Bond
An authority bond sometimes referred to as a local authority bond, is a debt security issued by an authority, such as a corporate or government agency. The bond's purposes are financing the operations of a revenue-generating public business.
Investors buy into the authority bond for a specified period which allows the project to be completed and earning revenue, after which the bond will pay interest at a specified rate. Investors in authority bonds have a claim to the business's revenues, which serve as the bond's yield. Authority bonds are generally considered low-risk investments, although the risk varies by the issuer.
BREAKING DOWN Authority Bond
An authority bond is a bond issued by an authority such as a government agency or public organization or company. The bond's security is from the proceeds from the specific project. While general bonds may be intended for maintenance and ongoing funds for governmental and civic agencies and infrastructure, an authority bond, like a municipal bond, applies to one specific project.
The risk of an authority bond correlates with the risk of the specific project the bond finances. While municipal bonds tend to finance low-risk infrastructure projects that the community is forced to use as a matter of course, authority bonds may fund projects that have varying degrees of appeal and may not earn the projected revenue.
Authority Bond vs. Municipal Bond
Authority bonds are similar to municipal bonds and are issued by related entities for the same purposes. There is some overlap in the types of projects they back, but there are fundamental differences between the two.
Municipal bonds tend to be issued for infrastructure projects, while authority bonds are for community organizations or expansions of organizations.
For example, a municipal bond, issued for building a new bridge, pays bondholders using the tolls from the new bridge. An authority bond, issued for a new wing on a community recreation center, pays bondholders with membership fees or day pass fees.
Another critical difference is authority bonds incorporate margin protections. Margin protections means bondholders have a guarantee they haven’t overpaid for the bonds. This warranty reduces bondholders’ risk because the lower price means that the project does not have to earn as much revenue to pay back the bondholders.