Question

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How might the risk associated with a city bond differ from the risk associated with a General Obligation bond issued by the state?  Would a private-activity bond be considered higher risk?  Why or why not?

Answer 1

Answer:

The General Obligation Bonds are backed by the full faith and credit of the issuer. There is no specific project identified as the source of funds. Thus, they are relatively safe and defaults in case of these bonds are rare. On the other hand, city bonds are backed by the revenue generated by the specific project and thus have higher risk and higher yields and chances of default also exist.

Yes, a private activity bond is considered to be risky as it not backed by full faith and the money is paid only in case of profit generated and there is no guarantee that money will be paid back. Thus, possibility of default exists and thus private activity bonds are considered to be risky.