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Question

Difficulty: EasyGovernment, Municipal, and Corporate Bonds

A municipality issues a debt security to finance the construction of a new public high school and pledges its full faith, credit, and ad valorem taxing authority to pay principal and interest. Which type of bond has been issued?

  1. General obligation bondAnswer
  2. B
    Revenue bond
  3. C
    Industrial development bond
  4. D
    Equipment trust certificate

Answer

The security issued is a general obligation bond.
General obligation (GO) bonds are municipal debt instruments backed by the full faith, credit, and taxing power of the issuing state or local government. Because public projects like high schools do not generate revenue directly, they are typically financed through GO bonds payable from general property (ad valorem) taxes.

Step-by-Step Solution

1
Identify the primary source of debt repayment mentioned in the stem.
The bond is backed by the full faith, credit, and general taxing authority of the municipality.
Municipal securities secured by general taxes rather than facility user fees are defined as general obligation bonds.

Key Concept

General Obligation (GO) Bond Backing
Estimated Time:45s
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Topics

Government, Municipal, and Corporate Bonds

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