General Obligation Bond Types
General Obligation (GO) bonds are a type of municipal bond that is backed by the full faith and credit of the issuing government entity. These bonds are typically issued by state or local governments to fund public projects such as schools, roads, and infrastructure improvements.
There are several types of general obligation bonds, including:
1. Unlimited Tax General Obligation Bonds: These bonds are backed by the unlimited taxing power of the issuing government entity. This means that the government can raise taxes as needed to meet its debt obligations. Unlimited tax GO bonds typically have lower interest rates compared to other types of GO bonds because of the higher level of security they offer to investors.
2. Limited Tax General Obligation Bonds: These bonds are backed by a limited amount of tax revenue, usually a specific tax or revenue stream. The issuing government entity can only use this designated revenue to repay the bondholders. Limited tax GO bonds may have higher interest rates compared to unlimited tax GO bonds because of the lower level of security they offer.
3. Appropriation-Backed General Obligation Bonds: These bonds are backed by the government’s promise to appropriate funds from its general budget to repay the bondholders. The government is not legally obligated to make these appropriations, but failure to do so would damage its creditworthiness. Appropriation-backed GO bonds typically have higher interest rates compared to unlimited or limited tax GO bonds because of the higher level of risk they carry.
4. Voter-Approved General Obligation Bonds: These bonds are backed by the approval of the voters in the issuing government entity. The government cannot issue these bonds without voter approval. Voter-approved GO bonds may have lower interest rates compared to other types of GO bonds because of the higher level of confidence they provide to investors.
Overall, general obligation bonds are considered to be one of the safest types of municipal bonds because they are backed by the full faith and credit of the issuing government entity. However, the specific type of GO bond can vary in terms of security and interest rates, depending on the backing and repayment structure.
General Obligation Bonds:
These bonds are typically used to fund projects that benefit the entire community, such as schools, parks, and roads. They are considered lower risk because they are backed by the taxing power of the municipality, making them more attractive to investors.
On the other hand, revenue bonds are backed by the revenue generated by a specific project or facility. For example, a revenue bond may be issued to finance the construction of a toll road, and the tolls collected from drivers would be used to repay the bondholders.
Differences:
One of the main differences between general obligation bonds and revenue bonds is the source of repayment. General obligation bonds are backed by the taxing power of the municipality, while revenue bonds are backed by the revenue generated by a specific project.
Another difference is the level of risk. General obligation bonds are considered lower risk because they have the full faith and credit of the municipality behind them. Revenue bonds, on the other hand, are higher risk because they rely on the success of a specific project or facility.
Emily Bibb simplifies finance through bestselling books and articles, bridging complex concepts for everyday understanding. Engaging audiences via social media, she shares insights for financial success. Active in seminars and philanthropy, Bibb aims to create a more financially informed society, driven by her passion for empowering others.