A revenue bond is a type of municipal bond secured by the total revenue generated by the relevant government entity or agency to guarantee bond repayments.
What Is a General Obligation Bond?
A general obligation bond (GO bond) is a type of municipal bond secured by the credit and taxing authority of the issuing jurisdiction, rather than by revenue from a specific project. These bonds are issued based on the expectation that the municipality will repay the debt using funds generated from taxes or project revenues, without any specific assets pledged as collateral.
Types of General Obligation Bonds
- Unlimited Tax General Obligation Bonds (UTGO): These bonds are backed by the full taxing authority of the issuing municipality or government entity, without a specific limit on the tax rate that can be levied to repay bondholders.
- Limited Tax General Obligation Bonds (LTGO): LTGO bonds are also supported by the taxing power of the issuing entity but with a capped tax rate. This means there's a maximum tax rate that can be imposed to ensure bond repayment.A limited-tax GO bond allows municipalities to raise property taxes.
How Does a General Obligation Bond Work?
Consider a scenario where a municipality plans a new project but lacks adequate funds to finance it. In this situation, the municipality can issue general obligation bonds.
Investors who buy these bonds provide funding to the municipality. In return, investors receive a share of the municipality's project-generated revenues and tax income. These revenue sources enable the municipality to fulfill interest and principal payments on the bonds.
Because repayment is backed by the municipality's entire revenue base, the risk of default is minimal. Therefore, GO bonds are regarded as secure investments, often earning favorable ratings from credit agencies.
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Bottom Line
GO bonds are backed by the issuer's overall taxing power, making them a more secure investment for bondholders.
