What is a General Obligation Bond?
A General Obligation Bond (GO Bond) is a type of municipal bond predominantly issued by local government entities, such as states, cities, or counties, in the United States. Unlike revenue bonds, which are secured by specific revenue sources, GO Bonds are backed by the “full faith and credit” of the issuing government. This means that the issuer has pledged to repay the bondholders by leveraging its taxing power. This could encompass various taxes, including property taxes (ad valorem taxes), sales taxes, or income taxes.
Examples of General Obligation Bonds
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School District Bonds: A local school district may issue GO Bonds to finance the construction of new school buildings or the renovation of existing facilities. The repayment of these bonds typically comes from property taxes within the district.
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Infrastructure Improvement Bonds: A city might issue GO Bonds to finance public works projects such as roads, bridges, and public transportation systems. The city can use its power to levy various taxes to ensure the repayment of these bonds.
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Public Safety Bonds: A county government might issue GO Bonds to fund the construction of new police or fire department facilities. The repayment would be secured by the county’s ability to raise taxes.
Frequently Asked Questions about General Obligation Bonds
What makes a General Obligation Bond different from a Revenue Bond?
GO Bonds are backed by the issuing entity’s ability to levy taxes, offering a broader security basis. Revenue Bonds, on the other hand, are repaid from specific revenue streams, such as tolls from a bridge or fees from a utility service.
What are the risks associated with General Obligation Bonds?
While GO Bonds are typically seen as low-risk due to their backing by government taxing power, they are still exposed to credit risk, which includes the possibility of the issuing government’s financial instability.
Who can issue a General Obligation Bond?
Local government entities, including states, municipalities, and counties, can issue General Obligation Bonds.
Are the interests from General Obligation Bonds tax-exempt?
Yes, the interest income from most GO Bonds is often exempt from federal income taxes and may also be exempt from state and local taxes where the bond is issued.
How are General Obligation Bonds rated?
Credit rating agencies assess these bonds. Issuers with higher credit ratings typically offer lower interest rates, while lower-rated bonds offer higher interest rates to attract investors due to perceived greater risk.
Related Terms
- Revenue Bonds: Bonds backed by specific revenue sources, such as tolls or service fees, rather than general taxing power.
- Municipal Bonds: Bonds issued by local government entities to finance public projects.
- Tax-Exempt Bonds: Bonds whose interest payments are free from federal income taxation.
- Credit Rating: An evaluation of the credit risk of a prospective debtor, predicting their ability to repay the debt.
Recommended Resources
Online References
- Municipal Securities Rulemaking Board (MSRB) - Offers detailed information on the rules and regulations governing municipal securities.
- Investopedia on General Obligation Bonds - Overview of the concept, risk factors, and benefits of GO Bonds.
- Securities and Exchange Commission (SEC) - Provides information on municipal bonds and the role of the SEC.
Suggested Books
- “Municipal Bonding Basics: Understanding Bonding and Its Impact on Taxpayers” by Frank Shafroth
- “The Fundamentals of Municipal Bonds” by The Bond Market Association
- “Municipal Bonds: The Basics and Beyond” by Robert Doty
Accounting Basics: General Obligation Bond Fundamentals Quiz
Thank you for learning about General Obligation Bonds and testing your knowledge. Understanding the intricacies of municipal bonds is crucial for making informed investment decisions in public finance!