What is a General Obligation (GO) Bond?

What is a General Obligation (GO) Bond?

A general obligation bond (GO bond) is a municipal bond backed solely by the credit and taxing power of the issuing jurisdiction rather than the revenue from a given project. General obligation bonds are issued with the belief that a municipality will be able to repay its debt obligation through taxation or revenue from projects. No assets are used as collateral.

A GO bond may be contrasted with a revenue bond in the context of munis.

How Does it Work?

A General Obligation Bond is a scheme that is introduced by the municipality to complete certain public projects which require a huge amount of capital. For the upliftment of society, the government sanctions some projects, and at times the municipalities are short of the capital to start and finish the project on time.

 The municipalities then issue these bonds in the name of that project, and the investors of the project buy the bonds from the municipalities and provide them the capital to start and finish the project. The municipalities guarantee these bonds.

The repayment on these bonds is also very prompt and with interest. There are rare situations when the municipalities default and the investor’s repayment is delayed or denied. The projects may fail, but the repayments of the investors are generally cleared. There are situations when the revenues fall short, and the municipalities have asked for taxes to compensate for the same.

Thus the process and the repayment of these types of bonds are very prompt, and the investors are at the lowest risk while investing their money in these bonds, and also, the credit rating agencies rank this bond as strong.

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Types of General Obligation Bonds

There are two types of general obligation bonds: the limited-tax GO bond and the unlimited-tax GO bond.

1. Limited-tax general obligation bond

A limited-tax GO bond allows municipalities to raise property taxes (within a certain specified limit) when it is necessary to meet the service payments of the debt.

2. Unlimited-tax general obligation bond

An unlimited-tax general obligation bond comes with similar features as the limited-tax version, but with no limit on the property tax increase. The property tax can be increased by up to 100%, but only with the consent of taxpayers. Note that for limited-tax GO bonds, the taxpayers’ approval is not usually required.

Benefits

  • This Bond is considered very safe and a good investment option for investors.
  • It is tax-exempt; therefore, it encourages investors to invest money in these types of bonds.
  • In case of any default, the investors will get the entire repayments from the tax authority since the municipalities have the right to call for more taxes than usual to pay the dues.
  • These bonds are issued in the market, and the capital is being raised on a large scale; thus, it encourages the investors to invest in general obligation bonds.
  • This also helps the municipalities to complete the project by issuing bonds in the market.
  • In the worst condition or any fiscal deficiency, when the project fails that time, the municipality must clear the debts from the entire revenue.

Limitations

  • They provide fewer returns than any other bond present in the market.
  • In this, the investors must choose between the returns or risks associated with the bonds.
  • It becomes very important for the investors to research the bonds before investing since many general obligation bonds are not tax-free, and the tax authority may not pay the dues.
  • Repaying such a bond can be very difficult, although it doesn’t depend upon the operating revenues of the ongoing projects.
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Conclusion

It is a government-aided bond issued to the public to raise capital in case of shortage. The big investments made for public welfare are sometimes arranged by issuing a general obligation bond. It is a safe option for any investor, but the returns are comparatively low here.

 In this repayment process, the investors will get the principal and the interest repaid on time. In the case of defaults, the municipalities are authorized by the government to increase the tax amount, which is receivable from the public, to pay off the dues and debts associated with the repayments to the investors.

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