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Difficulty: EasyGovernment, Municipal, and Corporate Bonds

A municipality intends to issue debt to finance the construction of a new public town hall and library, facilities that do not generate user fees or direct revenues. Which of the following debt instruments is backed by the full faith, credit, and general ad valorem taxing power of the issuing municipality?

  1. General obligation bondAnswer
  2. B
    Revenue bond
  3. C
    Corporate debenture
  4. D
    Industrial development bond

Answer

General obligation bonds are debt securities backed by the full faith, credit, and taxing power of the issuing municipality.
The correct answer highlights General Obligation (GO) bonds, which are backed by the full faith, credit, and general taxing power (such as property taxes) of the issuing state or local government entity. They are typically used to fund non-revenue-producing municipal projects like administrative buildings and public schools.

Step-by-Step Solution

1
Identify the issuer type and source of repayment described in the scenario.
The issuer is a municipality, and the project (town hall and library) produces no user revenue, requiring funding from general tax revenues.
Municipalities issue different bond types depending on whether debt service is paid from general taxes or specific project income.
2
Match the repayment backing mechanism to the correct security classification.
General obligation (GO) bonds are secured by ad valorem property taxes and the general credit of the municipality.
Non-revenue-generating civic projects such as public parks, town halls, and schools are standardly funded via general obligation debt.

Key Concept

General Obligation (GO) Bonds vs. Revenue Bonds
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Topics

Government, Municipal, and Corporate Bonds

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