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What is an Authority Bond?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 May 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Authority bonds have their purpose in allowing an entity to engage in the process of generating revenue that can be used for some project or set of projects planned by the entity. Both companies and government entities are capable of issuing a revenue or authority bond. There are some specific regulations that apply to the issuance of government bonds as well as corporate bonds if they are to be considered a proper authority bond. Here is some information about the authority bond, and how its use can be beneficial to both corporate bodies and government projects.

The structure of an authority bond is relatively straightforward. The issuing authority, either a business or a government, sells the bonds to interested parties. The revenue that is generated by the sale of the bond offer is in turn used to fund a project that is expected to make a great deal of money for the entity. A portion of the ongoing revenue stream from the project is used to make interest payment on each corporate bond or government bond issued. The result is that bond holders realize a return on their investment, in the form of interest that is paid as well as the repayment of the principle face value of the bond.

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Typically, an authority bond is issued with a specific project or set of projects in mind. Understanding the projects may or may not end up producing ongoing revenue, many entities that choose to issue an authority bond will take some steps to protect their investors in the even that the project ultimately fails. However, this type of action is voluntary in many instances, so it is important for anyone wishing to invest in the project by purchasing an authority bond to read the contract or agreement very closely. This will prevent any confusion about what the bond holder is and is not owed in the event that the project yields no generated revenue.

In most cases, the authority bond is a short-term financial arrangement. It is not unusual for both the face value and the interest on the bond to be repaid within a couple of years. However, an authority bond can also be issued for a long time investment, with the rate of applicable interest making the longer term attractive to bond holders. As a strategy for funding projects that may fall outside the scope of the usual operating and marketing budgets, an authority bond is a simple and effective way to finance what will hopefully turn into a new ongoing source of revenue.

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