A General Obligation (GO) Bond is a type of municipal bond that is secured by the full faith, credit, and taxing power of the issuing government entity. Unlike revenue bonds, which are repaid through the income generated from specific projects, GO bonds are backed by the general revenues and taxing authority of the issuer.
Types of General Obligation Bonds
- Unlimited Tax General Obligation Bonds (ULTGOs)
- Limited Tax General Obligation Bonds (LTGOs)
Unlimited Tax General Obligation Bonds (ULTGOs)
ULTGOs are bonds that are secured by the issuer’s ability to levy taxes without any statutory limitations. This provides a higher level of security to investors, as the issuer can raise taxes as needed to cover bond repayments.
Limited Tax General Obligation Bonds (LTGOs)
LTGOs, on the other hand, are backed by the issuer’s ability to levy taxes up to a certain limit. These bonds carry a slightly higher risk compared to ULTGOs due to the capped tax-raising ability.
General Obligation Bonds vs. Revenue Bonds
Security
- GO Bonds: Secured by taxing power and general revenues.
- Revenue Bonds: Secured by revenues from specific projects like toll roads or utilities.
Taxation Power
- GO Bonds: Broad taxing power of the issuer.
- Revenue Bonds: Limited to income from the funded project.
Risk
- GO Bonds: Generally considered safer due to the issuer’s tax authority.
- Revenue Bonds: Risks depend on the project’s success.
Historical Context
The use of GO bonds dates back to the development of municipal bond markets in the 19th century. Since their inception, they have provided a reliable means for governments to finance essential services and infrastructure projects.
Applicability in Modern Finance
In contemporary finance, GO bonds are crucial for funding large-scale public projects such as schools, highways, and hospitals. They are attractive to investors because of their relatively low risk and tax-exempt nature for certain categories.
Related Terms
- Municipal Bonds: Debt securities issued by local governments or their agencies.
- Tax-Exempt Bonds: Bonds that are exempt from federal income taxes and sometimes state and local taxes as well.
- Bond Rating: Assessment of the creditworthiness of a bond, typically issued by rating agencies.
FAQs
1. Why are GO bonds considered safer than revenue bonds?
GO bonds are backed by the full taxing power of the issuer, reducing the risk of default compared to revenue bonds which depend solely on the income from specific projects.
2. Can GO bonds lose their tax-exempt status?
Under certain conditions, such as misuse of funds or failure to comply with regulatory requirements, GO bonds may lose their tax-exempt status.
3. How are GO bonds rated?
GO bonds are rated by credit rating agencies based on the issuer’s financial health, economic base, and overall debt load.
References
- U.S. Securities and Exchange Commission (SEC). “Municipal Bonds: Understanding Credit Risks.”
- Investopedia. “General Obligation Bond (GO Bond).”
- Moody’s Investors Service. “Ratings Methodology for General Obligation Bonds.”
Summary
General Obligation (GO) Bonds represent a foundational component of municipal finance, offering a secure and reliable investment backed by the full credit and taxing power of the issuing entity. Understanding their types and distinctions from revenue bonds is crucial for both investors and policymakers.
This structured and detailed definition ensures a comprehensive understanding of General Obligation Bonds (GO Bonds), their relevance, and comparisons with revenue bonds. It also includes historical context, practical applications, and essential FAQs, making it an invaluable resource for readers interested in finance and investments.
