General obligation bonds are a type of municipal bond issued by a state or local government. The money to pay the interest and principal on a general obligation bond comes solely from the credit of the issuing entity. This is in contrast with revenue bonds, which derive their financing from a specific municipal project, such as a public parking garage or a toll road. General obligation bonds typically raise money for more generic and wide-reaching purposes, such as daily government expenses or parks and recreation. As an investor, you might buy a general obligation bond to earn tax-free income.
Step 1
Contact a broker. While in rare situations you might be able to buy a general obligation bond directly from the issuing municipality, the vast majority of these bonds are sold through brokers on the secondary market.
Step 2
Research the credit rating of the bond. Outside agencies, such as Standard & Poor's, review the financial viability of bond issues and rates bonds. The higher the rating a bond receives, the more likely it will meet its payment obligations, in the opinion of the rating agency. Consider your own risk tolerance and compare it with the perceived risk of your potential purchase.
Step 3
Find out the interest pay dates of the bond. Typically, general obligation bonds pay interest twice per year. However, each issuer determines the terms of its bonds. Ask your broker, or read the bond's offering material itself, to determine when you will receive your payments.
Step 4
Check the maturity date of the bond. The maturity date of a bond is when the issuer pays off the face value of the bond, usually $1,000 per bond. The longer the maturity, the more the price of the bond will typically fluctuate in response to movements in market interest rates.
Step 5
Understand the minimum purchase commitments. Most bonds are sold in minimum lots of $5,000, but individual brokers may require minimums of $10,000, $25,000 or even more.
Step 6
Ask your broker what the mark-up or commission on the bond will be. You'll have to pay this cost in addition to the price of the bonds themselves.
Step 7
Pay for your bonds. Once you have determined the total net price, authorize your broker to buy the bonds and make payment. You can finance your bond purchase with existing cash in your account, the liquidation of other securities, or the deposit or transfer of funds into your account.
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Writer Bio
After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.