It is a government bond that is secured with the government's pledge to use all available resources to repay holders of the bond. General obligation bonds are usually used to fund government projects that will serve the public community.

General obligation bonds are different from another type of municipal bonds called revenue bonds. The repayment of revenue bonds is protected only by operational revenue streams and cannot be protected by tax revenues, whereas GO bonds allow use of both revenue sources.

Local governments use General obligation bonds as a means to raise capital for projects that create various streams of revenue such as roads, parks and bridges.

Types of General Obligation Pledges

Not every project under Local government can use General Obligation bonds. State laws dictate the basis on which local governments can provide and issue general obligation bonds.

Coming back to the types of GO bonds, A GO can either be a limited-tax general obligation pledge or an unlimited-tax general obligation pledge.

So what exactly is a limited-tax general obligation pledge and unlimited-tax general obligation pledge?

In limited-tax general obligation pledge, The local government which has issued the bond has to raise property taxes if required to meet its debt service obligation. However, the local government has to follow the statutory limit at the time of increasing property taxes. Local governments can also use another income stream, or use a part of property taxes already levied to service its existing debt obligations.

The only difference between the limited-tax general obligation pledge and an unlimited-tax general obligation pledge is that the local government, if required, can be asked to increase property taxes up to a maximum of 100% to cover delinquent taxpayers. Credit analysts assess the ability of the issuer to enforce penalties against and recover taxes from tax evaders. Due to the government guarantee, unlimited tax bonds often have higher credit ratings and offer lower yields than other comparable municipal bonds having the same maturity.