NASAA Series 65, Uniform Investment Adviser Law ExaminationInvestment Vehicle CharacteristicsHard
A financial advisor is discussing the characteristics of different municipal bonds with a client. The client is particularly interested in bonds where the principal and interest payments are backed by the full faith and credit of the issuing municipality, with taxing power to support repayment. Which type of municipal bond is being described?
- ASpecial Assessment Bond
- BGeneral Obligation (GO) Bond
- CRevenue Bond
- DIndustrial Development Bond (IDB)
Show answer & explanationAnswer & explanation
Correct answer: B. General Obligation (GO) Bond
General Obligation (GO) bonds are backed by the full faith and credit of the issuing municipality, which includes its ability to levy taxes to repay the debt, fitting the client's description.
Why the other options are wrong
- A. Special Assessment Bonds are repaid from assessments on properties that benefit from a specific project, not general taxing power.
- C. Revenue bonds are backed solely by the revenue generated from the specific project they finance, not the general taxing power.
- D. Industrial Development Bonds (IDBs) are a type of revenue bond used to finance industrial facilities, with repayment from the facility's revenues.
General Obligation (GO) Bond
A municipal bond that is backed by the full faith, credit, and taxing power of the issuing governmental unit.
- Repaid from the general revenues of the issuer, often including property taxes.
- Requires voter approval for issuance.
- Considered less risky than revenue bonds due to broader backing.
- Used to finance public projects that do not generate their own revenue (e.g., schools, roads).
Memory trick: Muni bonds: GO for general taxes, Revenue for specific projects.