General Obligation

Lesson

General obligation bonds are a type of municipal bond backed by the issuing municipality's full faith and credit. These bonds are used to finance public projects and are repaid through various sources of revenue, such as taxes and fees. Investors in general obligation bonds typically receive interest payments exempt from federal income taxes and, in some cases, state and local taxes.

Practice Question #1

Which of the following best describes a general obligation bond?

A) A bond issued by a corporation to finance a new project

B) A municipal bond backed by the full faith and credit of the issuing municipality

C) A bond issued by the federal government

D) A municipal bond repaid from a specific source of revenue

Select an option above to see an explanation here.

A) A bond issued by a corporation is a corporate bond, not a general obligation bond. B) A general obligation bond is a municipal bond backed by the full faith and credit of the issuing municipality. C) A bond issued by the federal government is a Treasury bond, not a general obligation bond. D) A municipal bond repaid from a specific source of revenue is a revenue bond, not a general obligation bond.

Terms

General obligation bond:: A municipal bond backed by the full faith and credit of the issuing municipality.
Municipal bond:: A debt security issued by a state, municipality, or county to finance public projects.

Practice Question #2

Which of the following is a key difference between general obligation bonds and revenue bonds?

A) General obligation bonds have a higher default risk than revenue bonds.

B) General obligation bonds are backed by the full faith and credit of the issuer, while revenue bonds are repaid from a specific source of revenue.

C) General obligation bonds are subject to federal income taxes, while revenue bonds are tax-exempt.

D) General obligation bonds are issued by corporations, while revenue bonds are issued by municipalities.

Select an option above to see an explanation here.

A) General obligation bonds typically have a lower default risk than revenue bonds due to their full faith and credit backing. B) General obligation bonds are backed by the full faith and credit of the issuer, while revenue bonds are repaid from a specific source of revenue. C) Both general obligation bonds and revenue bonds are typically tax-exempt. D) Municipalities, not corporations, issue both general obligation bonds and revenue bonds.

Do Not Confuse With

Revenue bonds:: Unlike general obligation bonds, revenue bonds are repaid from a specific source of revenue and do not have the full faith and credit backing.

Practice Question #3

Which of the following is a characteristic of general obligation bonds?

A) Interest payments are subject to federal income taxes.

B) The bonds are repaid from a specific source of revenue, such as tolls or fees.

C) The bonds are backed by the full faith and credit of the issuing municipality.

D) The bonds are issued by corporations to finance public projects.

Select an option above to see an explanation here.

A) Interest payments on general obligation bonds are typically tax-exempt. B) General obligation bonds are not repaid from a specific source of revenue; this is a characteristic of revenue bonds. C) General obligation bonds are backed by the full faith and credit of the issuing municipality. D) General obligation bonds are issued by municipalities, not corporations.

Historical Example

In the 1970s, a city issued general obligation bonds to finance the construction of a new sports stadium. The bonds were repaid through property taxes, sales taxes, and user fees generated by the stadium. The project was successful, and the city could repay the bonds on time and in full.

Practice Question #4

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Example Series 65 Example Practice Question

Real-World Example

A small town builds a new library and issues general obligation bonds to finance the project. The bonds are repaid through property taxes collected from residents and businesses in the town. Bond investors receive tax-exempt interest payments, making the bonds an attractive investment for those seeking income that is not subject to federal income taxes.