A general obligation bond (GO bond) is a type of municipal bond that relies entirely on the credit and taxing authority of the issuing area, instead of depending on the income generated from a specific project. These bonds are issued with the expectation that the municipality can meet its debt obligations through taxes or income from various projects. There are no assets pledged as collateral.
In comparison, a GO bond differs from a revenue bond when discussing municipal finance.
Learn more about General Obligation Bond
A general obligation (GO) bond is backed by a government’s commitment to utilize all available resources — including tax revenues — to pay back the bondholders.
At the local level, this commitment might involve a promise to impose property taxes to fulfill the local government’s responsibilities to the bondholders. For instance, property owners are motivated to pay their property taxes to avoid losing their properties due to unpaid bills, which is why credit rating agencies view general obligation pledges as having strong credit qualities and often give them high investment-grade ratings. If property owners fail to pay their taxes by the due date, the government has the legal right to raise the property tax rate to cover any shortfalls. On the due date, the general obligation pledge mandates that the local government must settle the debt using its available resources.
Additionally, general obligation bonds are a means for local governments to gather funds for projects that generate income for various needs like roads, parks, equipment, and bridges. Typically, these bonds are used to finance government initiatives that benefit the public community.
How General Obligation Bond Works
Picture a scenario where a city wants to kick off a new project but doesn’t have enough funds to make it happen. In this situation, the city can issue general obligation bonds.
When investors buy these bonds, they give money to the city. In exchange, they get a share of the city’s earnings from the project, along with some tax revenue. These income sources help the city pay back both the interest and the principal on the bonds.
Since the repayment is backed by all of the city’s revenues, the chances of default are pretty low. Because of this, GO bonds are seen as safe investments. It’s not unusual for these bonds to get high ratings from credit rating agencies.