Definition
A General Obligation Bond (GO Bond) is a type of municipal bond that is secured by the full faith and credit of a municipal entity, with its repayment guaranteed by all available revenues. It specifically relies on tax revenues, such as property taxes, for repayment of the bond. These bonds are commonly used by local and state governments for public infrastructure projects such as roads, schools, or parks.
Key Takeaways
- General Obligation Bonds are municipal bonds that are backed by the full credit and taxing power of the issuing jurisdiction rather than the revenue from a specific project. This provides a greater sense of security for investors.
- As these bonds are used to fund public projects like highways, schools, and parks, they play a crucial role in serving the community’s needs and enhancing infrastructure.
- The interest on General Obligation Bonds is often exempt from federal income taxes, and sometimes state and local taxes as well, making them an attractive investment option for individuals in high tax brackets.
Importance
The finance term “General Obligation Bond” is important because it represents a type of municipal bond that’s backed by the full faith, credit, and taxing power of the issuing jurisdiction, rather than revenue from a specific project.
This provides a significant level of security for investors because even if the project funded by the bond fails, the issuing body is still obligated to pay back the bondholders in full.
As such, because of the reduced risk, these types of bonds often have lower interest rates than revenue bonds or corporate bonds.
Furthermore, understanding General Obligation Bonds is crucial for municipalities and other governmental entities as they are a primary tool for raising funds for a variety of public projects including infrastructure and schools.
Explanation
The purpose of a General Obligation Bond (GO Bond) fundamentally lies in its use to acquire funds for public projects that fulfill the community’s needs and are expected to enhance the citizens’ quality of life in the long term. These public initiatives could include building new schools, hospitals, highways, or other critical infrastructures.
These bonds are issued mainly by state and local governments and are called “general obligation” because they are backed by the full faith and credit of the issuer, which typically has the power to tax residents to repay bondholders. Moreover, its use as an investment vehicle is equally crucial.
Investors purchase GO bonds as a form of a fixed-income investment. These bonds are considered a relatively safe investment because they are backed by the credit and taxing power of the issuing jurisdiction, giving bondholders a high level of security.
In the event of financial distress or bankruptcy of the issuer, general obligation bondholders are usually repaid before other creditors. As such, GO bonds play a dual role in both capital financing for public projects and providing low-risk investment opportunities to investors.
Examples of General Obligation Bond
New York City’s Issuance of GO Bonds for Infrastructure Projects: New York City regularly issues general obligation bonds to fund public projects. For example, in 2020, the city issued $
1 billion in tax-exempt general obligation bonds to fund infrastructure projects such as road repairs, park improvements, and school construction.
California’s Proposition 13 School Bonds: In 2020, voters in California considered passing Proposition 13, a $15 billion general obligation bond to repair and modernize schools, colleges, and universities in the state. The debt service on the bond would be paid from the state’s General Fund.
Houston, Texas GO Bonds for Public Improvements: In 2018, The City of Houston, Texas, issued around $1 billion in general obligation bonds to fund public improvements related to public safety, parks, public health facilities, and libraries. This issue was aimed to maintain and enhance Houston’s infrastructure without increasing the property tax rate.
FAQ – General Obligation Bond
What is a General Obligation Bond?
A General Obligation Bond is a type of municipal bond backed by the full faith, credit, and taxing power of the issuing municipality. They are typically used to finance public projects like the construction of schools, highways, and other infrastructure projects.
How is a General Obligation Bond different from a Revenue Bond?
While both are types of municipal bonds, they differ in their source of repayment. A General Obligation Bond is repaid from general taxes and other revenue sources. On the other hand, a Revenue Bond is repaid from the revenue generated by the specific project it is financing.
Are General Obligation Bonds safe?
While no investment is 100% risk-free, General Obligation Bonds are often considered a safer investment because they are backed by the full credit and taxing power of the issuing municipality. However, the actual risk can vary depending on the financial stability of the issuing municipality.
How can an investor buy a General Obligation Bond?
General Obligation Bonds can be purchased through an investment broker. Some municipalities also offer direct purchase programs. It’s important for investors to understand the risks and benefits of any investment before making a decision.
What happens if a municipality defaults on a General Obligation Bond?
In the rare event of a default, bondholders have a legal claim on the assets of the municipality. However, recovering investments can be a long and complex process. It’s crucial for investors to assess the financial health of the issuing municipality before investing in General Obligation Bonds.
Related Entrepreneurship Terms
- Municipal Bonds
- Bond Rating
- Tax-Exempt Interest
- Debt Service
- Principal and Interest
Sources for More Information
- Investopedia is a premier online source that provides educational content about finance. They give detailed definitions and explanations about financial terms and concepts including General Obligation Bond.
- MunicipalBonds.com specializes in topics related to municipal bonds, which includes General Obligation Bonds. They offer deep dives into these types of bonds, their benefits, and their risks.
- U.S. Securities and Exchange Commission (SEC) is an official government agency that regulates the securities industry. They have a wealth of information about different types of bonds.
- Treasury Direct is a website operated by the U.S. Department of the Treasury. They can provide detailed and reliable information about numerous types of bonds, including General Obligation Bonds.
