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Definition: Sub Sovereign Obligation
Sub Sovereign Obligation is the debt given by the higher authority to the lower authority in a government. It is issued by the levels below the central government and it is in the form of the government bonds. It is usually given to municipal and to complete the local projects.
The most important aspect is to determine the risk of such bonds and the risk is mainly dependent on the financial stability of the bodies to which the loans are given to. They are also known as municipal debt obligation. So in sub Sovereign Obligation these municipals issue government bonds to the higher authority and in return they get money and which have to be paid back then only these municipal or any other local body will get the government bonds. Thus government bonds act as a collateral in the debt. So it represents debts of state, province municipal or any other government body other than the central government.
So the sub sovereign obligation is mainly used for funding and it is returned as soon as the project is over. The financial position of the issuing body is checked thoroughly in order to determine the risk and even on the projects the body is investing in checked.
Thus the advantages of the sub sovereign obligation to municipalities are that the interest rate is low and for the investor it is beneficial as it is less risky and interest rate are not taxed. The default rate of such bonds are less than the corporate bonds so thus they are much safer,
But the problems faced are that for issuing such bonds to higher authority they should have credit rating and sufficient budget capacity. The return is less as the risk related to it is also less. But still there is some risk as compared to bonds issued by central government as these local authorities have a chance of default.
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