General Obligation (GO) Bond: Definition, Types, Vs. Revenue Bond

Published: November 30, 2023

Learn about General Obligation (GO) bonds, their different types, and how they compare to revenue bonds. Understand the role of finance in these investment instruments.

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Understanding General Obligation (GO) Bond: Definition, Types, Vs. Revenue Bond

Welcome to the Finance category of our blog, where we explore various topics related to personal and corporate finance. In today’s post, we will dive into the fascinating world of General Obligation (GO) Bonds and explore their definition, types, and how they compare to Revenue Bonds. If you have ever wondered how governments fund various projects or how bonds work in general, this article will answer your questions and provide you with a solid understanding of this essential financial tool. So, let’s get started!

Key Takeaways:

General Obligation (GO) Bonds are issued by governments to finance public projects and are backed by the full faith, credit, and taxing power of the issuing entity.
Revenue Bonds, on the other hand, are backed by the revenue generated from specific projects or sources, such as tolls, fees, or lease payments.

What are General Obligation (GO) Bonds?

General Obligation (GO) Bonds are a type of municipal bond issued by governments, including states, cities, and counties, to raise funds for various public projects. These projects can range from building schools, hospitals, and highways to improving infrastructure and public services.

GO Bonds are considered one of the safest investments in the municipal bond market because they are backed by the full faith, credit, and taxing power of the issuing entity. This means that the government pledges to use its general revenue, including taxes, to repay the bondholders. The primary source of repayment comes from the entity’s ability to levy and collect taxes from residents or businesses within its jurisdiction.

There are two main types of General Obligation Bonds:

Unlimited Tax General Obligation (UTGO) Bonds: These bonds are often backed by an unlimited property tax levy, meaning the issuing entity can increase taxes if needed to meet its debt obligations. UTGO Bonds typically offer lower interest rates compared to other types of bonds due to their strong repayment guarantee.
Limited Tax General Obligation (LTGO) Bonds: LTGO Bonds are backed by a limited or specific tax revenue source. This could include sales tax, income tax, or other dedicated revenue streams. The taxing authority for these bonds is restricted to a predetermined amount or rate. As a result, LTGO Bonds may carry slightly higher interest rates than UTGO Bonds.

General Obligation (GO) Bonds Vs. Revenue Bonds

While General Obligation Bonds and Revenue Bonds both serve as financial instruments utilized by governments, they differ in some critical ways:

General Obligation (GO) Bonds	Revenue Bonds
Backed by the full faith, credit, and taxing power of the issuing entity.	Backed by revenue generated from specific projects or sources.
Repayment source is the entity’s ability to levy and collect taxes.	Repayment source is generated from project-specific revenue streams, such as tolls, fees, or lease payments.
Considered safer and have lower interest rates due to their strong repayment guarantee.	Carry slightly higher interest rates as they are backed by project-specific revenue, which may have more variability.

In Conclusion

In summary, General Obligation (GO) Bonds are an essential financial tool utilized by governments to fund various public projects. They offer a reliable investment opportunity as they are backed by the full faith, credit, and taxing power of the issuing entity. On the other hand, Revenue Bonds are backed by the revenue generated from specific projects. Understanding the differences between these two bond types can help investors make informed decisions based on their risk appetite and investment goals.

We hope this article has provided you with valuable insights into General Obligation (GO) Bonds, their types, and how they compare to Revenue Bonds. If you have any further questions or would like to explore another finance topic, feel free to browse our Finance category for more helpful articles.