Moral Obligation Bond

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Definition: Moral Obligation Bond

It is a type of bond issued by any municipality or government body and differs majorly from other type of bonds in the sense that this bond has a moral pledge.

This type of bond not only gives the tax benefit that we usually get from a government or a municipal body, but also a moral pledge that in case of any default the body is obligated to pay back the complete money. So it is a moral pledge of commitment against default. The commitment issued by the body has to backed by a fund, so that it can meet its claim in case of a default, this is done by a reserve fund that Is established to meet any debt services cost that the government is unable to make for any of its bond services.

But the main point in this bond is the additional obligation provided by the government in case of default is a moral obligation and not a legally binding one. SO if the government is unable to keep its promise, then the bind holder will not be able to go to courts to settle his issue. But as per statistics, most of the time the morally binding bond is helped out by government reserve fund in case of a default. Also to help bond holders with the moral claim, the credit rating agencies would cut the credot rating of the government in case it defaults on a moral bond, so in many of the cases the government abides by its moral obligation and pays back the bind holder.

Basically it’s a bond, in addition to its primary security, there is a non-binding covenant that any amount that is required so that the deficiency in its bond services, like paying back the bond amount or paying back the coupons and all will be included in the budget recommendations made by the governing body, so that the shortfall in funds can be sponsored with.


Hence, this concludes the definition of Moral Obligation Bond along with its overview.

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