General obligation bond

Understanding General Obligation Bonds

A general obligation bond, commonly referred to as GO bond, is a type of municipal bond backed by the credit and taxing power of the issuing jurisdiction rather than the revenue from a given project. General obligation bonds are issued with the promise to repay the debt using general funds, including collected taxes and other revenues. These bonds are often used by local governments to raise funds for public projects such as schools, parks, and roads.

Relation to Financial Factoring

Financial factoring is a transaction where businesses sell their accounts receivable, or invoices, to a third party at a discount in order to get instant cash. Though general obligation bonds and financial factoring are different financial tools, they can intersect. For example, a company that specializes in financial factoring may purchase invoices related to a public project financed by GO bonds. This offers the company a reliable source of repayment, as such projects usually have strong government backing.

Key Features of General Obligation Bonds

General obligation bonds have several distinct features. They're secured by the full faith and credit of the issuer, which gives investors confidence in their investment. Also, repayment of these bonds typically occurs over a long-term period, and they often have tax advantages since the interest earned is generally exempt from federal income tax, and possibly state and local taxes as well.

Investing in General Obligation Bonds

When you invest in general obligation bonds, you're essentially lending money to a government entity under the assurance that the loan will be repaid with interest using the entity's taxing power. Investors consider GO bonds as a stable and low-risk investment compared to corporate bonds, especially since they're often backed by the issuer's ability to levy taxes to cover bond payments.

Understanding the Risks

Like all investments, general obligation bonds come with a degree of risk. While GO bonds are generally seen as secure, investors must consider the financial health of the issuer. An issuer facing economic challenges might have difficulty fulfilling its bond obligations, potentially impacting the bond's value and the return on investment.