What distinguishes a general obligations bond from a revenue bond?

A general obligation bond is primarily distinguished by being backed by the full faith and credit of the issuing government, meaning it is secured by the government's ability to levy taxes and generate revenue. This type of bond does not rely on specific revenue sources for repayment; rather, it is supported by the overall financial strength and creditworthiness of the government entity, which includes its taxing power.

Revenue bonds, in contrast, are secured by specific income streams generated from a particular project or service, such as tolls from a toll road or fees from a utility. Because they depend on designated revenues, these bonds usually do not have to be secured by the broader taxing authority of the issuing government. This difference is key to understanding how general obligation bonds are funded and the level of risk associated with them compared to revenue bonds.

The implications of this distinction are significant for investors and taxpayers. Investing in general obligation bonds is generally seen as less risky because they are backed by a broader financial foundation as opposed to just project revenues, which may fluctuate.