General Obligation Bonds Definition

Definition

The word general obligation bond can be utilized to spell out a debt security issued by local or state authorities. Unlike a sales bond, that will be procured by a particular income-generating thing, a general obligation bond is procured with the municipality’s assurance to use legally available methods, namely tax earnings, to settle this debt.

As may be true with other debt, even if a bail bond is issued for a duration of five decades or longer, they represent a very long-term responsibility and are displayed at the long-term obligations section of this balance sheet.

Explanation

Issuing longterm bonds represents an essential source of financing for a lot of municipalities. General obligation bonds are secured by the entire faith and credit of the issuing municipality. To satisfy this commitment, local authorities include a guarantee to increase real estate taxes to reimburse this debt. This means bond-holders have the right to require the borrowing bureau inflict this kind of tax to meet this duty.

For this particular cause, credit rating agencies consider a broad liability bond’s danger of non payment to be somewhat small, and an average of reward those securities with investment grade ratings.

Normally, there are two Kinds of general obligation bonds:

  • Limited-Tax: a statutory limitation is put on the total amount of property taxation that the town is allowed to inflict to settle debt.
  • Unlimited-Tax: there isn’t any limitation to the total amount of property taxation that the town is permitted to inflict to settle debt. Local authorities desperate to issue unlimited-tax duties could be asked to seek consent using a vote.

In training, the issuing entity has three potential sources of revenue: it could work with a part of property taxation in-place, it might boost real estate taxation, or it might apply a different source of revenue.