FINRA Series 7Investment Information and Suitable RecommendationsEasy
A municipality issues bonds to build a new public school. The bonds will be repaid through the municipality's general taxing authority, including property taxes. This type of municipal bond is best classified as a:
- AGeneral obligation bond
- BRevenue bond
- CIndustrial development bond
- DMoral obligation bond
Show answer & explanationAnswer & explanation
Correct answer: A. General obligation bond
General obligation (GO) bonds are backed by the full faith, credit, and taxing power of the issuing municipality, typically including property taxes, making them suitable for projects like schools that do not generate direct revenue.
Why the other options are wrong
- B. Revenue bonds are repaid from a specific revenue-generating project, not general taxes.
- C. Industrial development bonds are backed by lease payments from a corporate user, not general taxes.
- D. Moral obligation bonds have only a non-binding pledge of state legislative support, not direct taxing power.
General Obligation Bond
A municipal bond backed by the full faith, credit, and taxing power of the issuer, commonly used for non-revenue-producing projects like schools.
- Backed by taxing power (property, income, sales taxes)
- Typically requires voter approval
- Used for schools, roads, general government projects
Memory trick: 'GO bonds are backed by the taxman's grip.'