General Obligation Bond (GO)
Candlefocus EditorUnlike revenue bonds, GO bonds are not backed by specific income streams generated by the projects they fund. Rather than from revenue sources, repayment of funds borrowed from GO bonds comes from the issuer’s creditworthiness and its ability to raise revenue by levying taxes on its citizens.
As with other types of bonds, investors purchase GO bonds to provide them with income in the form of interest payments. Generally, when the government needs to take out a loan for a set period, it turns to a bond to finance the loan which is repayable on a schedule specified by the term of the bond. When citizens of a state or local government purchase a GO bond, they essentially lend the government money at a specified rate of interest.
The amount of taxation available to a particular GO bond can be specified as limited or unlimited. With limited GO bonds, the taxes that must be levied are capped at a set amount and cannot be raised if the government runs into financial difficulty. With an unlimited GO bond, the government has more flexibility in regarding taxes–assuming that the maximum tax rate has already been levied by the taxpayers in the municipality. As such, should finances deteriorate, the government is able to increase taxes in order to generate more revenue in order to make payments on the bonds.
GO bonds are most often issued with a set rate of interest and maturing date. At the maturity date, the principal of the bond is repaid. Due to their credit ratings, interest payments on GO bonds are typically lower than those of other types of municipal bonds and as such are attractive investments for those seeking stable returns with lower risk.
In conclusion, GO bonds are a popular form of long term financing used by local and state governments to pay for public projects, equipment and services. Their repayment is entirely dependent on the issuer’s ability to levy taxes on the citizens which gives the government flexibility in repaying the bonds if its finances deteriorate. GO bonds are seen to be relatively safe investments with lower risks and offer stable returns.