Obligation Bond

See: Moral Obligation Bond.

Your town has a stretch of road downtown widely derided as "pothole alley." It's become a real danger. As such, your city councilmembers have bravely stepped up to fix the problem. They've put an action item on this year's agenda to protect its citizens against the damage caused by this menace. Specifically, they want to put up a series of signs that read: "Beware of Potholes." (A low-grade solution, sure...but filling potholes costs real money.)

One problem: even with the relatively low cost of the signs, your town's government has no money in the budget to buy them. They need some way to raise cash.

One option? Issue a general obligation bond.

A general obligation bond represents one of the two main types of debt instruments municipalities can use to raise money. The other is called a revenue bond. It's backed by revenue from a specific project. So...if your town wanted cash to run a haunted hayride, it could issue a revenue bond backed by the cash earned from selling hayride tickets.

However, in cases where no specific revenue is attached to the project (like putting up "Beware of Pothole" signs), local governments issue general obligation bonds. Instead of a particular revenue stream, these debt instruments are backed by the government's overall tax and credit authority. It will use the funds it collects from local taxes to keep up with interest and principal payments.