What to Know About an Authority Bond

An authority bond is a type of bond that is issued in order to fund a project that is designed to create revenue. This type of bond can be issued by corporations or government entities. In most cases, an authority bond is issued in order to fund a specific project or a series of projects. This project is generally a public business that is deemed to earn a substantial amount of money. Investing in this type of bond can be profitable for investors and it also is considered to be a safe investment.

Investment Risk

The investors in this type of bond know that there is a bit of risk involved because they are putting money into a project that has not yet been completed. The money that is generated from a project will be used to pay for the coupon payments of the bondholders. At a certain point in the future, the bondholders will also be able to redeem their bonds and receive the original principal back. Investors have to be aware of the fact that the project may not work out and they may lose most of their investment. 

Time Frame

This type of bond is considered to be a short-term investment. While many corporate bonds and government bonds can last up to 30 years, these bonds will generally be for less than 10 years. In most cases, they will even be less than five years. In some cases, the bond could be for the long-term, if the investment is involved with larger projects. 

Returns

Many investors like this type of investment because it generally pays better interest rates than regular bonds. These bonds are regularly issued for projects that are considered to be very profitable. Because of this, the entity that issues them can afford to pay higher rates on the bonds. This is ideal for investors that want to create a regular income for themselves over the span of a few years. At the end of the term, they can even get their original investment back. 

Assurances

In some cases, the bond issuer has to do something in order to entice investors. When investors are skeptical about a particular project, the issuer of the bond might do something to guarantee their payments. They could tie the bonds to collateral or purchase bond insurance in order to alleviate their fears. This way, if the project goes into default, the bondholders will not be left without any repayment.

Choosing Authority Bonds

If you are interested in investing in authority bonds, you will need to research them extensively before investing. When choosing this type of bond, you should look at the entity that is issuing it. For example, you should feel very comfortable investing in a bond that is issued by a government-sponsored enterprise. If you are dealing with a smaller company that has not been this type of bond before, you might be a little bit more hesitant to invest.

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