What does the 'full faith and credit' of a government ensure in terms of bonds?

The concept of 'full faith and credit' essentially means that a government commits to using its financial resources, including taxing power and revenue generation, to honor its financial obligations, including the repayment of bonds. When a government issues bonds under this principle, it reassures investors that it will prioritize the payment of interest and principal, thus guaranteeing that bondholders will be paid back. This assurance is crucial for maintaining investor confidence and securing favorable borrowing terms.

This principle directly influences the government's ability to issue bonds at lower interest rates, as investors view such bonds as lower-risk instruments. The commitment to full repayment solidifies the credibility of the issuing government and is a foundational aspect of public finance. In contrast, the ability to change tax rates, control over state budgeting, or investing in municipal projects, while related to the overall financial operations of a government, does not inherently guarantee bondholder payments in the same way as the full faith and credit does.