What Is a State Bond?

by Carmelo Montalbano ; Updated July 27, 2017

State bonds represent the issuance of debt for a state to undertake long term construction and development projects. State bonds are expected to be self-sustaining without impairing the regular cash flow needs of the state. Every state in the union issues bonds with varying maturity structures, credit ratings, and purposes. State bonds are a vital debt financing mechanism for infrastructure needs.

What is a state bond?

A state bond is a general obligation municipal bond issued by any state of the United States. The security should represent the full faith and credit of the issuing state.

What is a double barrelled state bond?

Some states issue bonds that are backed by a specific revenue stream with dedicated revenue to pay off the outstanding interest and principal. Backstopping the revenue stream with the state's general obligation guarantee is called a double barreled municipal bond.

Does Puerto Rico and other United States Territories Issue State Bonds?

No, Only the 50 states may issue state bonds. Any issuing authority such as Puerto Rico may issue general obligation bonds and revenue bonds. These bonds may be tax-exempt but they are not state bonds.

Do State Bonds Have a Federal Guarantee?

No. The full faith and credit of the state is the strongest credit rating of every state's bond issue. The federal government no longer issues bonds through state auspices that carry federal guarantees and have exemption from income taxes.

How are State Bonds Rated?

The three major rating agencies, Moody's, Standard and Poor's, and Fitch rate state municipal issuance for a fee. The rating rests upon the strength of the individual state's finances.

Are State Bonds Exempt From All City and Local Taxes?

This is a matter left to the individual states to decide for themselves. Some states allow only some state bonds to be tax-exempt at the city and local level. Some states do not allow any further tax deduction below the state level.

Are the Terms of Issuance the Same for State Bonds?

No, Each state has its own rules for bond issuance. Call features, maturity structures and sinking funds are determined on a state-by-state, issue-by-issue basis.

About the Author

After an 18-year career on Wall Street as a trader of municipal and mortgage backed securities, Carmelo Montalbano developed a very large desktop trading application that managed more than 30 institutional portfolios. Technology and small business acquisitions continue to be his primary interest.