General Obligation Municipal Bonds is a type of municipal bond that is the most secure bond. They offer a safe investment to the investor while providing the local government with the funds for the improvement of the community. They are issued by the local government in order to raise the funds. They are generally backed by the credit of the issuer. General obligation municipal bonds are different from the revenue bonds since these bonds have the ability to back the bond payments along with the tax funds. They serve as a tool for the municipalities to raise funds. The type of projects that are funded by these bonds may be for the construction of highways or schools.
The government entity can pay on the bonds by using the received tax revenue. If there is a requirement of more money then the local government can increase the taxes in order to get the additional amount of money to cover the interest of general obligation municipal bonds.
General Obligation Municipal Bonds are generally used to fund the projects which in turn serve the whole community. The reason that these bonds are low risk investments is that they are supported by the credit of municipalities. It means that the funds that are raised from the taxes can be applied by the municipalities in order to meet the obligations.
Since the credit of municipalities stays behind the general obligation municipal bonds have high bond ratings. General obligation municipal bond rate with high grade corporate bonds to gain the confidence of the investor. They usually have lower interest rates as they are backed by the credit of municipalities. These bonds provide federal income tax free returns in order to make up for its low interest rates.
General obligation municipal bonds can be obtained from the municipality that issues these bonds or from the secondary market. There is a minimum purchase that you require to make when you buy these bonds from the brokers. General obligation municipal bonds can be divided into two categories i.e. The unlimited tax general obligation bonds and limited tax general obligation bonds.
Unlimited tax general obligation bonds are supported by the taxing power of the issuer. It can make use of sales tax, special taxes, property and other income sources in order to repay the investors.
Limited tax general obligation bonds are supported by a narrow taxing power. It has a limited tax backing for the bonds. They are generally secured by the municipal revenues.
General obligation municipality bonds have always been considered as one of the safest bonds. There are other companies that often go out of business but the municipalities offer a strong incentive in order to preserve the credit since they cannot go out of the business. The interest that is generated from these bonds is free from the federal income tax. If you purchase the general obligation municipal bonds of the state that issues these bonds then it is also free from the state income tax. The credit quality of these bonds has been high since the local government needs to balance the budget.