Bond Resolution: What It Means, How It Works, Uses

What Is a Bond Resolution?

A bond resolution is a document where the issuer authorizes a bond's issuance and sale, along with defining the rights of the respective parties to the bond contract, namely the issuer and the bondholder.

Understanding Bond Resolutions

Typically, a bond resolution is a document used with government bonds, especially general obligation bonds (GO), that outlines the rights and responsibilities of the issuer and the bondholder and the specifics of the obligation. The bonds represent money loaned and entitle the holder to interest payments and the return of principal. A bond resolution can also be called a bond indenture or a bond ordinance.

How a Bond Resolution Works

The term bond resolution is typically applicable to bonds issued by municipalities. A bond resolution describes how much interest and principal will be paid to bondholders, when and how payments will be made, how bonds may be redeemed, and what happens in the event of default.

For example, a bond resolution might authorize a municipality to issue $10 million in refunding bonds to refinance an outstanding water revenue bond and to finance the cost of improvements to facilities of the municipal region. In certain jurisdictions, the governing body will act by means of a bond ordinance rather than by resolution.

Uses of Bond Resolutions

A bond resolution also describes how bond funds may be used. Failure to meet the payment requirements may lead to serious consequences and penalties including liquidation of the issuer's assets.

If the issuer intends to increase taxes on its residents in order to generate tax income to be used in the interest and principal payment of the general obligation bonds, the bond resolution may stipulate that only a certain percentage of the tax may be funded into debt.

In some cases, such as with revenue bonds, a bond indenture is used instead of a bond resolution to define the legal terms of the bond issue and its financing.

A bond resolution indicates the call features of a bond issue. For instance, it outlines how a sinking fund should be used in retiring all or a portion of outstanding bonds. The fund requires an issuer to regularly fund an escrow account, which will be used to pay off debt as it comes due.

Furthermore, the resolution also includes guidelines on the issuance of additional bonds, payable from the revenue received from the project to be financed by the municipal bond.

Bond Resolutions and the Issuance of New Bonds

A bond resolution also refers to a ballot measure that allows voters to approve or deny the issuance and sale of new bonds for a stated purpose. It consists of the authorizing resolution and the award resolution.

Issuance of the securities is usually approved in the authorizing resolution, and sale is usually authorized in a separate document known as the award resolution. This type of bond resolution describes the nature and location of the project to be financed and the project's maximum potential cost.

The Bottom Line

Bond resolutions provide a variety of details in relation to the issuance of a bond and record the important information between the issuer and the bondholder, allowing all information to be clear and open.