Overview
A general obligation bond (GO bond) is a type of municipal bond backed by the credit and taxing power of the issuing jurisdiction rather than revenue from a specific project. These bonds are issued with the expectation that the issuing municipality will repay its debt obligation through taxation or other general revenue, with no assets used as collateral.
A GO bond differs from a revenue bond in that it relies solely on the issuer’s ability to levy taxes, rather than income generated from financed projects.
Key Takeaways
- A general obligation (GO) bond is a municipal bond fully supported by the issuer’s creditworthiness and tax-raising capabilities.
- Unlike revenue bonds, GO bonds are not secured by specific assets and do not refund creditors from project-related income.
- GO bonds can have either limited or unlimited tax support.
- In the case of unlimited GO bonds, municipalities have the authority to increase property taxes to meet payment obligations.
Understanding General Obligation Bonds
General obligation bonds are secured by the issuing government’s pledge to use all available resources, including tax revenues, to meet bond repayment obligations.
For example, municipalities may pledge to leverage property taxes to fulfill bondholder commitments. Property owners, who prioritize maintaining their property stakes, often ensure timely tax payments. Consequently, credit rating agencies typically give high investment-grade ratings to GO bonds.
If property owners fail to pay taxes by the due date, the government can legally raise property tax rates to cover those delinquencies. On the designated date, the municipality must use every available resource to fulfill the debt requirements of the GO bond.
GO bonds often fund community-serving projects like roads, parks, equipment, and bridges. These projects do not necessarily generate revenue but benefit public infrastructure and thus the community.
Types of General Obligation Pledges
State laws regulate the issuance of general obligation bonds, with pledges categorized as either limited-tax or unlimited-tax.
Limited-tax GO Bonds:
The issuing government may need to increase property taxes within a statutory limit to meet debt service obligations. Governments can use previously-levied property taxes, alternatively levied income, or other streams of income to satisfy their debt payments.
Unlimited-tax GO Bonds:
This pledge allows local governments to increase property tax rates to necessary levels, even up to 100%, if applicable, to cover taxpayer delinquencies. For such bonds, residents’ agreement is vital for scaling up property taxes to meet the bond’s payment demands.
Related Terms: municipal bond, revenue bond, collateral, credit rating, property tax.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a General Obligation Bond (GO)?
- [x] A municipal bond backed by the credit and taxing power of the issuing jurisdiction
- [ ] A corporate bond backed by physical assets
- [ ] A bond that is only backed by the revenue from a specific project
- [ ] A type of bond with no guarantee and only based on the issuer’s credibility
## How are General Obligation Bonds typically repaid?
- [ ] Via revenue generated by a specific project
- [x] Through general taxation or other forms of revenue available to the issuer
- [ ] By the personal assets of the municipal officials
- [ ] Solely through federal funding
## Which of the following is a key feature of a General Obligation Bond?
- [ ] It generates higher risk compared to other types of municipal bonds
- [ ] It typically has a fluctuating revenue stream backing it
- [x] It has the full faith and credit of the issuing government
- [ ] It is not subject to credit ratings
## Who generally issues General Obligation Bonds?
- [ ] Private corporations
- [ ] Non-governmental organizations
- [x] Municipalities and local governments
- [ ] International banking institutions
## What is the main difference between a General Obligation Bond and a revenue bond?
- [ ] GO bonds have a specific project revenue backing; revenue bonds do not
- [ ] GO bonds are not backed by the government’s taxing power; revenue bonds are
- [x] GO bonds are backed by taxing power, while revenue bonds are backed by specific project revenues
- [ ] There is no significant difference
## Why might an investor choose a General Obligation Bond?
- [x] Because of their generally lower risk due to the backing by taxing power
- [ ] For the potential of significant appreciation value
- [ ] To benefit from higher-than-average interest rates
- [ ] To diversify into high-risk investment instruments
## How do credit rating agencies typically view General Obligation Bonds?
- [x] As relatively low-risk investments due to government backing
- [ ] As higher risk due to lack of asset backing
- [ ] As equally risky as corporate junk bonds
- [ ] With uncertainty since they are not taxable
## In which scenarios might a municipality issue a General Obligation Bond?
- [ ] To fund a private enterprise
- [x] To finance public projects such as schools, roads, and parks
- [ ] To back a new federal law mandated expenditure
- [ ] None of the above
## Which of the following best describes the risk associated with General Obligation Bonds?
- [ ] High default risk comparable to corporate bonds
- [x] Lower risk due to the reliable income stream from taxes
- [ ] Totally risk-free, with no possibility of default
- [ ] High volatility influenced primarily by market trends
## Which of the following entities is typically responsible for repaying General Obligation Bonds?
- [ ] The Federal Reserve
- [ ] The issuing government official's personal estate
- [x] The local government that issued the bond
- [ ] The company managing the muncipal project
