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

General Obligation (GO) bonds and Revenue bonds are two primary types of municipal bonds, each with distinct characteristics and uses: 1. **General Obligation (GO) Bonds**: - **Definition and Security**: GO bonds are backed by the full faith, credit, and taxing power of the issuing jurisdiction. This means the local government pledges to use all available resources, including tax revenues, to repay the bondholders. - **Types of Pledge**: GO bonds can be either limited-tax or unlimited-tax general obligation pledges. A limited-tax GO pledge allows the government to raise property taxes if necessary to meet existing debt service obligations, but within a statutory limit. - **Credit Quality**: Credit rating agencies often assign investment-grade ratings to GO bonds due to the strong credit quality of the pledge. - **Use**: These bonds are typically used to fund government projects that will serve the public community, such as roads, parks, equipment, and bridges. 2. **Revenue Bonds**: - **Definition and Security**: Revenue bonds are secured by the revenue generated specifically from a project, such as tolls, fees, or lease payments, rather than tax revenues. The repayment is primarily guaranteed by the operating revenues of the entity, not the full faith and credit of the issuer. - **Types of Projects**: Revenue bonds are often used to finance income-producing projects like airports, toll roads, highways, utility systems, hospitals, and public education facilities. - **Credit Risk**: Revenue bonds are considered somewhat less secure than GO bonds because they are tied to the success of a specific project. If the project does not generate sufficient revenue, the bondholders may not be repaid. - **Yield**: Revenue bonds historically yielded more than GO bonds due to the higher credit risk, but this has become less pronounced in recent years. In summary, GO bonds are considered more secure and are backed by the full taxing power of the municipality, making them a preferred choice for investors seeking lower risk. Revenue bonds, while offering potentially higher yields, carry higher credit risk and are suitable for projects that can generate sufficient revenue to cover the bond payments.