General Obligation (GO) Bonds

What is a General Obligation Bond?

A General Obligation Bond (GO Bond) is a type of municipal bond issued by state and local governments to finance various projects, such as roads, schools, and public facilities. Unlike revenue bonds, which are backed by specific sources of revenue, GO bonds are backed by the full faith and credit of the issuing government. This means that if necessary, the government can raise taxes to pay off the bondholders. GO bonds are considered a secure investment, as they have a low default rate, and are therefore widely used by individuals and institutions as a means of generating income and diversifying portfolios. However, the interest earned on GO bonds is subject to federal, state, and local taxes.

Advantages of General Obligation Bonds

Advantages of General Obligation Bonds include:

Low Default Risk

GO bonds are considered to be low risk because they are backed by the full faith and credit of the issuing government.

Tax-Exempt Interest

The interest earned on GO bonds is exempt from federal taxes and, in some cases, state and local taxes.

Diversification

GO bonds can be a useful tool for diversifying an investment portfolio.

Relatively Stable Returns

GO bonds offer relatively stable returns compared to other investments, making them a good option for conservative investors.

Liquidity

GO bonds are widely traded and can be easily bought and sold, providing investors with liquidity.

Support for Public Projects

By investing in GO bonds, individuals and institutions can support the financing of important public projects, such as infrastructure, schools, and hospitals.

What Are the Disadvantages of General Obligation Bonds?

Disadvantages of General Obligation Bonds include:

Taxable Interest

Although the interest earned on GO bonds is exempt from federal taxes, it is subject to state and local taxes.

Interest Rate Risk

The value of GO bonds can fluctuate in response to changes in interest rates, which can impact their return.

Credit Risk

While GO bonds are considered low risk, there is always a risk that the issuing government may default on its obligation to repay the bonds.

Inflation Risk

The value of GO bonds can be negatively impacted by inflation, as it can decrease the purchasing power of the interest payments and the returned principal.

Limited Access

GO bonds may not be available to all investors, as some may have minimum investment requirements or be restricted to institutional investors.

Political Risk

The financial stability of the issuing government can be impacted by political factors, such as changes in leadership or economic policies, which can affect the value of GO bonds.

What Are the Types of General Obligation Bonds?

There are two main types of General Obligation Bonds:

Limited Tax GO Bonds

These bonds are backed by the issuing government's pledge to use a limited portion of its property tax revenue to repay bondholders.

Unlimited Tax GO Bonds

These bonds are backed by the full faith and credit of the issuing government, which means that if necessary, the government can raise taxes to repay the bonds. This type of GO bond is considered to be higher risk than limited tax GO bonds.

It is important to note that the exact structure and terms of GO bonds can vary from one issuing government to another, so it is important to carefully review the bond's offering document and credit rating before making an investment.

Conclusion

In conclusion, General Obligation Bonds are a type of municipal bond that are backed by the full faith and credit of the issuing government. They offer relatively stable returns and can be a good option for conservative investors looking for tax-exempt income and diversification. However, it is important to consider the potential disadvantages of GO bonds, such as interest rate risk, credit risk, and political risk, before making an investment. It is also important to research the creditworthiness of the issuing government and review the bond's offering document and credit rating. As with any investment, it is always important to consult with a financial advisor to determine if GO bonds are appropriate for your individual investment goals and risk tolerance.