General Obligation Bond

General Obligation Bond Municipal Bonds Government Securities Tax Revenue Bond Markets Public Financing Debt Instruments
A General Obligation Bond (GO Bond) is a type of municipal bond backed by the full faith and credit of the issuing government, which has the authority to levy taxes to repay bondholders.
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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

  1. 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.

  2. 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.

  3. 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.

  • 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.

Online References

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

### What primary feature distinguishes a General Obligation Bond from other types of bonds? - [x] It is backed by the issuer's full faith and credit. - [ ] It is backed solely by revenues from a specific project. - [ ] It offers higher than average interest rates. - [ ] It is typically issued by private corporations. > **Explanation:** A General Obligation Bond is uniquely backed by the full faith and credit of the issuer, which includes the power to levy taxes for repayment. ### Can a General Obligation Bond be backed by property taxes? - [x] Yes, property taxes are a common backing for GO Bonds. - [ ] No, property taxes cannot be used. - [ ] Only in special circumstances. - [ ] It is illegal to use property taxes for GO Bonds. > **Explanation:** Property taxes are commonly used to secure GO Bonds, providing a reliable source for repaying the bondholders. ### Which entity is most likely to issue a General Obligation Bond? - [ ] A commercial bank - [x] A city government - [ ] A private corporation - [ ] A non-profit organization > **Explanation:** General Obligation Bonds are typically issued by governmental entities like a city, state, or county to fund public projects. ### What is one primary risk consideration for investors in General Obligation Bonds? - [ ] Fluctuating commodity prices - [x] The creditworthiness of the issuing government - [ ] Market competition - [ ] The profitability of a specific project > **Explanation:** The primary risk is the creditworthiness and financial stability of the issuing government, which affects its ability to continue servicing the debt. ### Are interests earned from General Obligation Bonds generally tax-exempt? - [x] Yes - [ ] No - [ ] Only for federal taxes - [ ] Only for state taxes > **Explanation:** The interest income for most GO Bonds is typically exempt from federal income tax and often from state and local taxes as well. ### What would happen if an issuing government cannot meet its payment obligations for a General Obligation Bond? - [ ] Bondholders are paid through insurance. - [x] The government might increase taxes. - [ ] The bond becomes a revenue bond. - [ ] The bondholders lose their investment entirely. > **Explanation:** If a government struggles to meet its payment obligations, it might increase taxes to generate the required revenue, as these bonds are backed by the government's taxing power. ### Which best describes the backing of a General Obligation Bond? - [ ] Interest month earnings of the issuing entity - [ ] Project-specific revenue - [x] The issuer’s full taxing power - [ ] Loan from a financial institution > **Explanation:** GO Bonds are supported by the issuer's full taxing power, providing a broad security base for repayment. ### Can a GO Bond be used to fund private sector projects? - [ ] Yes, with special permissions - [x] No, usually these bonds fund public sector projects - [ ] Only within specific industries - [ ] Dependent on the bond rating > **Explanation:** GO Bonds are typically utilized to fund public sector projects like schools, roads, and infrastructure improvements. ### How is the interest rate on General Obligation Bonds usually determined? - [ ] Based on prevailing mortgage rates - [ ] Set by the investors - [x] Influenced by the credit rating of the issuing government - [ ] Linked directly to stock market performance > **Explanation:** The interest rate is influenced by the credit rating of the issuing entity—higher credit ratings generally imply lower interest rates. ### Which entity regulates the issuance and trading of General Obligation Bonds? - [ ] Federal Reserve - [ ] State Government - [x] Municipal Securities Rulemaking Board (MSRB) - [ ] Department of Treasury > **Explanation:** The MSRB sets the rules and regulates the issuance and trading of municipal securities including General Obligation Bonds.

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!

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