General Obligation Bond

Definition

A General Obligation Bond (GO Bond) is a type of bond issued by a government and backed by its full faith and credit. This means that the issuing government pledges to use all available resources, including tax revenues, to repay the bond's principal and interest. General obligation bonds are typically used to fund public projects such as schools, roads, bridges, parks, and other infrastructure developments.

Origin

The concept of general obligation bonds originated from the need for governments to raise funds for public projects. As urbanization and infrastructure development increased, governments required a reliable financing method to support these projects. General obligation bonds became a popular choice because they offer the government's full faith and credit as a guarantee, reducing the risk for investors.

Categories and Features

The main features of general obligation bonds include:
1. Government Guarantee: Backed by the full faith and credit of the government, ensuring debt repayment.
2. Tax Support: Governments can use tax revenues to repay the bonds, including property taxes, sales taxes, and other taxes.
3. Lower Risk: Considered a lower-risk investment tool due to government backing.
4. Public Use: Funds raised are typically used to finance large public infrastructure projects, benefiting society.

Case Studies

Case Study 1: Suppose a city government plans to build a new public school and decides to issue $50 million in general obligation bonds to raise funds. The city government pledges to use future tax revenues to repay these bonds and backs them with the government's full faith and credit. Investors who purchase these bonds will receive regular interest payments over the agreed term and the principal upon maturity.
Case Study 2: A state government plans to construct a new highway and issues $100 million in general obligation bonds. The state government commits to repaying the bonds through increased fuel taxes and toll revenues. This arrangement ensures the safety of investors' funds and helps the government complete an important infrastructure project.

Common Issues

Investors considering general obligation bonds may encounter the following issues:
1. Government Default Risk: Although low, if the government's financial situation deteriorates, it may affect bond repayment.
2. Interest Rate Risk: Changes in market interest rates can affect the bond's market value.
3. Tax Changes: Changes in tax policies may impact the government's ability to repay the debt.