Moral Obligation Bond

Moral obligation bond

A tax-exempt bond issued by a municipality or a state financial intermediary that is backed by the moral, but not legal, obligation of a state government to appropriate funds in case of default .

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Moral Obligation Bond

A municipal or other government bond in which the issuing entity promises to create and maintain a special fund to protect against default. For example, if a city issues a bond and finds itself unable to service its debt based on property tax collection alone, it may withdraw money from this emergency fund to protect itself against default. Importantly, a moral obligation bond does not legally oblige the issuer to create this fund, hence the name "moral" obligation. The issuer would, however, find its credit rating decreased if it does not do so. As such, moral obligation bonds generally receive a high credit rating.