Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

General Obligation Bond

What it is:

A general obligation bond is a municipal debt issue that is secured by a broad government pledge to use its tax revenues to repay the bond holders.

How it works (Example):

General obligation debt issued by local governments generally requires a pledge of full faith and credit of the local government.  Since a local government's credit is based on tax receipts, it is pledging the receipt of taxes and its ability to levy those taxes in support of the debt.  Local governments are able to secure the receipt of taxes through priority liens on property.  As a result, general obligation bonds, supported by the taxing and lien powers, carry the credit rating of the local government.

General obligations bond usually carry a lower interest rate because of the lower risk of default.  As a result, the debt is less expensive to local governments.  However, general obligation bonds are considered a liability on a local government's balance sheet.
 

Why it Matters:

General obligations bonds are usually a safe investment because of the pledge of the local government's taxing authority.  For the investor, however, it is important to know the extent of the general obligation debts outstanding and the track record of the taxing authority in collecting taxes, executing liens, and paying its bond holders.