Which Bond Is Safer—and Which One Pays More?

Not all municipal bonds are created equal. Two of the most common—and important—types you’ll come across are revenue bonds and general obligation (GO) bonds. Both are issued by state and local governments to fund public projects, but they differ dramatically in how they’re backed, repaid, and evaluated by investors.

Whether you’re a conservative investor looking for low-risk income or seeking higher yields and can handle more risk, knowing the difference between these bonds is essential. This guide breaks down how they work, their pros and cons, and when each type might be right for your portfolio.

What Are General Obligation Bonds (GOs)?

General obligation bonds (GOs) are municipal bonds backed by the full faith and credit of the issuing government, meaning the municipality pledges its taxing authority—such as property, income, or sales taxes—to repay bondholders. Unlike revenue bonds, which rely on income from a specific project, GO bonds are supported by the overall financial strength of the government. This broader backing makes them one of the safest types of municipal bonds, often carrying high credit ratings. GO bonds are typically used to fund essential public services like schools, parks, roads, and public safety facilities that may not produce direct revenue but benefit the community as a whole.

Key Features of GO Bonds:

• Backed by taxing authority (not project revenue)
• Often used for schools, parks, roads, and public safety infrastructure
• Viewed as lower risk due to government guarantee
• Subject to voter approval in many jurisdictions

When you invest in a GO bond, you’re essentially betting on the municipality’s ability to raise revenue through taxes—not the success of any specific project. For a comprehensive understanding of general obligation bonds, including their definitions and types, refer to Investopedia’s guide: General Obligation Bond: Definition, Types, Vs. Revenue Bond.

Example:

If a city wants to build a new public school, it might issue GO bonds and commit to repaying the debt with future property tax revenues. Even if the school doesn’t generate money, the city can still raise taxes to meet its obligations.

What Are Revenue Bonds?

Revenue bonds are a type of municipal bond that are repaid using the income generated from a specific project or revenue-producing source, such as toll roads, water and sewer systems, airports, hospitals, or sports stadiums. Unlike general obligation bonds, revenue bonds are not backed by the issuer’s taxing authority—instead, investors are repaid solely from the revenues that the financed project is expected to produce. This makes them inherently riskier, as repayment depends on the project’s success and financial performance, but they often offer higher yields to compensate for that added risk.

Key Features of Revenue Bonds:

• Backed by project or enterprise revenues—not taxes
• Common for utilities, transportation, and hospitals
• Carry more risk than GO bonds
• Higher yields to compensate for added risk

Example:

Let’s say a municipality builds a toll bridge. It might issue revenue bonds backed solely by the income from toll collections. If toll revenue falls short, investors may not be repaid in full or on time.

Unlike GO bonds, revenue bonds do not give investors recourse to tax revenues if the project fails. This makes them riskier—but often more rewarding for those seeking higher yields.

Major Differences at a Glance

How Credit Ratings Differ

GO Bonds:

Because they are backed by taxation, GO bonds tend to earn higher credit ratings. Agencies like Moody’s and S&P evaluate the municipality’s tax base, economic strength, and fiscal discipline.

Revenue Bonds:

These are judged on the project’s feasibility, revenue projections, and operational efficiency. Credit ratings may be lower unless the issuer has a long history of reliable income streams.

Fun Fact: According to Moody’s, from 1970 to 2022, GO bonds had a default rate of just 0.1%, compared to 0.3% for revenue bonds.

Why Yield and Risk Go Hand-in-Hand

It’s a fundamental principle in investing: higher yield usually means higher risk. GO bonds are considered safer, so they pay lower interest. Revenue bonds, being tied to potentially uncertain revenue streams, offer higher yields to attract investors. This makes revenue bonds popular with income-focused investors—especially those willing to accept a bit more risk in exchange for better returns.

Tax Advantages of Both

Both revenue and GO bonds generally offer federal tax-exempt interest, and often state/local exemptions too—especially if you reside in the issuing state. This makes them ideal for high-income investors seeking tax-free income.

Investor Suitability: Who Should Buy What?

General obligation bonds are ideal for conservative investors seeking stable, low-risk income backed by government taxing power. Revenue bonds may be better suited for those willing to accept slightly higher risk in exchange for higher yields, especially income-focused investors who can evaluate project performance. Your choice depends on your risk tolerance, income needs, and investment goals.

GO Bonds May Be Better For:

• Risk-averse investors
• Retirees seeking stable income
• Investors in low-tax states who prefer peace of mind

Revenue Bonds May Be Better For:

• Income seekers comfortable with slightly more risk
• Investors in higher tax brackets looking for yield
• Those with municipal bond expertise who can evaluate projects

Real-World Examples

GO Bond:

New York City issues GO bonds to fund repairs for public schools, secured by future property taxes. Investors trust NYC’s ability to collect taxes, making the bonds highly rated and relatively safe.

Revenue Bond:

A California transportation agency issues bonds to finance a new toll expressway. The bond is backed solely by toll collections—making it riskier, but potentially higher-yielding.

How to Buy and Evaluate Each Type

Municipal bonds can be purchased through:

• Brokerages (as individual bonds)
• Mutual funds focused on GO or revenue bonds
• Exchange-traded funds (ETFs)

When analyzing them:

• Review credit ratings
• Examine bond covenants (rules governing repayment)
• Understand the underlying project or tax base
• Consider your tax situation

To learn more about the mechanics of bond investing, see What Is a Bond and How Does Bond Investing Work?.

FAQs

Q: Are general obligation bonds safer than revenue bonds?
A: Generally, yes. GO bonds are backed by taxes, while revenue bonds depend on project income.

Q: Can a revenue bond default?
A: It’s rare, but more likely than with GO bonds—especially if the project underperforms.

Q: Which bond type pays more interest?
A: Revenue bonds usually pay higher yields to compensate for their additional risk.

Q: Do I pay taxes on municipal bond income?
A: Most municipal bond interest is exempt from federal taxes. State/local taxes may also be waived if you live in the issuing state.

Q: Can I invest in both types?
A: Absolutely. Many diversified muni bond funds and ETFs include a mix of both for balanced income and risk exposure.

Making the Right Choice for Your Portfolio

The decision between revenue and general obligation bonds boils down to risk tolerance and income goals. GO bonds offer stability and security, backed by government taxes. Revenue bonds can deliver higher yields—but only if the underlying project performs well. For conservative investors, GOs may feel like the safer bet. For those seeking extra income and willing to do some due diligence, revenue bonds might be the better fit.

As always, diversify when possible and evaluate the specific details of each bond, including maturity, yield, and call features. A strong mix of both could provide balance, especially in a rising rate environment or uncertain economy. Not sure how bonds fit into your overall investing strategy? Explore our breakdown of Stocks vs. Bonds: What’s the Difference and Which Should You Choose? to compare these two core asset classes.

Revenue bonds and general obligation bonds each offer distinct advantages for municipal bond investors. GO bonds provide security through the backing of government taxing authority, making them a stable choice for risk-averse investors. Revenue bonds, while carrying more risk, can deliver higher yields tied to specific project performance. Understanding their differences helps you make informed decisions and build a well-balanced, resilient bond portfolio aligned with your income and risk preferences.