What is a Combination Bond?

Malcolm Tatum

Combination bonds are bond issues that derive their financial backing from more than one source. Often, this will include revenue that is generated by the issuing entity as well as revenue that is generated by a pre-existing source or a mechanism that is put in place at the same time as the issue of the bond. The combination bond is a popular format for the issue of municipal bonds.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

The concept of the double barrel or combination bond has been around for a number of years. Part of the reason for the popularity of the bond is that it offers a higher guarantee of protection for investors. Municipal bonds of other types are either backed with the promise of the issuer, or with some type of plan to generate revenue during the life of the bond that will make it possible to honor the bond at maturity. The combination bond uses both these approaches and thus represents a lower risk for the investor.

One aspect of the combination bond may be the secondary source of the funding for the bond issue. In some cases, the municipality may be able to borrow funds from an existing slush fund. When this is the case, it is understood that borrowing from the secondary source will mean repaying the source once the the investors have received full compensation.

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However, it must be understood that with the lower amount of risk comes a lower rate of return. The typical combination bond is issued with a lesser rate than obligation or revenue bonds, since the chance of failure is minimized. Still, the usual rates for a combination bond tend to be better than the interest rate earned on a standard savings account or a Certificate of Deposit. This means that investors who want to stick with relatively safe investments may find the combination bond to be an excellent choice.

Like all municipal bonds, it is relatively easy to bond issues that are configured as a combination bond. Many municipalities publish listings of current bond issues that are available, and note the type of bond involved. Many brokers who deal in bond issues will also have information readily available regarding current combination bond offerings that may be of interest to the investor. Online resources will often help an interested party locate a combination bond issue that would be of interest.

Discussion Comments

anon125548

Does a combination bond count towards municipal debt limits in Illinois?

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