Full Faith and Credit
Definition
The term “Full Faith and Credit” is a phrase that signifies a government entity’s absolute pledge to utilize all available taxing and borrowing powers, in addition to other revenue streams, to fulfill its commitments of paying interest and repaying the principal on its issued bonds. This assurance primarily backs U.S. government securities and general obligation bonds (GOBs) of states and local governments.
Examples
- U.S. Treasury Bonds: These bonds are backed by the full faith and credit of the United States government, assuring investors of the government’s commitment to meet its debt obligations.
- Municipal General Obligation Bonds: A city might issue a general obligation bond to fund public projects like schools or infrastructure, backed by the city’s full taxing authority and other revenue.
Frequently Asked Questions (FAQs)
Q1: What does “full faith and credit” guarantee to bondholders?
- A1: It guarantees that the issuing government entity will use all available financial resources, including its power to tax and borrow, to ensure timely payment of interest and principal.
Q2: How does “full faith and credit” differ from revenue bonds?
- A2: Full faith and credit bonds are backed by the government’s general revenues and taxing power, while revenue bonds are repaid from specific revenue sources like tolls or utility payments.
Q3: Are U.S. government securities risk-free due to full faith and credit?
- A3: They are considered very low-risk investments because they are backed by the full financial power of the U.S. government.
Related Terms with Definitions
- General Obligation Bonds (GOBs): Bonds issued by local or state governments that are backed by their full taxing power and general revenues.
- Revenue Bonds: Bonds that are repaid from the revenues generated from the specific projects or sources the bonds are issued to finance.
- Municipal Bonds: Debt securities issued by states, cities, counties, and other governmental entities to fund public projects.
Online References
Suggested Books for Further Studies
- “Public Finance and Public Policy” by Jonathan Gruber.
- “Investing in Municipal Bonds: How to Balance Risk and Reward for Success in Today’s Bond Market” by Philip Fischer.
- “The Basics of Public Budgeting and Financial Management” by Charles E. Menifield.
Fundamentals of Full Faith and Credit: Financial Management Basics Quiz
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