- What Is the Difference Between a Treasury Bond & a Savings Bond?
- Comparison of a Bond Vs. Promissory Note
- How to Determine When a Savings Bond Matures
- How Should a Bond With a Sinking Schedule Work?
- The Difference Between Municipal & Taxable Bonds
- Does Every Savings Bond Have a Different Interest Rate?
Bonds and levies are two different ways for a municipality to raise revenue. A bond is debt, offered to the public, which must eventually be repaid with interest. By contrast, a levy is a tax that towns and counties impose on local property owners in order to raise money for services. Municipal governments will often have different requirements for levies than for bonds.
What Are Bonds?
Bonds are debt. Bonds may be issued by many sources: companies, cities, states, even the U.S. Treasury. For example, a state wants to build a new park that will cost $1 million, but doesn't have the money. In this case, the state may issue $1 million worth of bonds, which the public can buy. The bond buyers pay for the bonds immediately, giving the state ready cash. However, the state must pay a certain percentage of interest on the bonds to the bondholders, typically in yearly payments. The bonds will also have a maturity date, a specific time in the future at which the state will be obligated to buy the bonds back from the bondholders, thus repaying the original purchase price (the principal on the debt).
"Levy" refers to the act of imposing a tax in order to raise revenue. For example, counties that need to raise money will often levy an extra tax on property owners within the county. After some research, the county will define the dollar amount it needs. Then it will spread this amount over the county's property owners, assessing the levy on each in proportion to the size and value of their property. The county will then use the money raised to fund county services or specific projects. These types of specialized levies are typically approved by the voters before the levy is made.
Advantages and Disadvantages
A bond issue generally offers the advantage of raising cash immediately via sale. The revenue from a levy may only come in over time. But levied tax, unlike a bond, holds the great advantage of not needing to be repaid in the long run; repayment is understood to be the service or amenity that the county's property owners will reap from their payment. Additionally, if the bond's interest rate is not fixed, but rather tied to external interest rates or other financial factors, there may be a level of uncertainty to a bond issue that isn't found in a levy.
While bonds and levies may be used for the same projects in some localities, others apply different rules to the two devices. In some counties, for instance, the money raised from bonds may be used for specific construction projects, but not for the maintenance of already-built facilities; such maintenance would require a levy instead. In addition, some local governments may require different numbers of votes to approve bonds and levies; one may need only a majority vote, while the other requires approval of two-thirds of the voters. Some states may not require a vote at all.