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General Obligation Municipal Bonds
Bonds that are backed by the taxing power of a municipality are known as General Obligation or GO Bonds. The issuer raises taxes and sets the money aside to pay back principal and interest to the municipal bondholders.
Taxes used for GO Bonds include: Property, Income, Sales and others.
Every state and many local areas offer these bonds. The interest earned on them is federally tax free. The tax free yield is higher on municipal bonds vs. other debt investments.
These are different than Revenue Bonds, which uses non tax dollars to secure the Municipal bond issue.
As with all municipal bond investments, general obligation or GO issues are best suited for people who are not in low tax brackets. The tax rate of the investor will affect the overall rate of return on these bonds.
Most municipal bonds are callable. The yield may be effected by the G.O. bond being called early or going to maturity.
The Yield To Maturity or Yield To Call should be examined before investing.
All GO bonds are rated by rating agencies. These credit agencies will examine the bond issue and give it a credit rating. AAA is the highest, AA, A and even Baa are considered investment grade bonds and are safe. In reality, almost 100% of municipal general obligation bonds pay off in full at maturity. In some cases, the state will back a local government bond - in the event the local municipality bond cannot pay.
All things being equal, general obligation securities are considered more secure than revenue bonds because of the tax backing.
See also: Closed End Muni Fund - Taxation
Muni Bond Blog - Read more and ask questions of the experts on trading, investing and taxation strategies.
Limited Tax Bonds
Issuers can sell bonds backed by limited taxing power on the GO issue. Thus, there is a limited tax rate used to fund the municipal issue. The risk to the bondholder and general obligation issue is if the municipality cannot raise enough to fund the security.
Mill Rate - Millage
Property taxes can be used on G.O. Munis by using a fixed milage rate to assess the tax used by the town or local authority. This tax backs the G.O. bond when using property taxes as the main source.
Debt Limit
Some local and state municipal issuers of general obligation securities will have a debt limit that is set to them. This would represent the maximum allowable bonds they could have issued at any one time or outstanding. If the issuer is at it's limit, it would not be able to issue any new GO and would then have to sell revenue backed muni bonds.
Copyright  2006 American Investment Training, Inc.
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