Moral Obligation Bond

Definition - What does Moral Obligation Bond mean?

Moral Obligation Bond is a type of municipal revenue bond that will allow the state or municipality to vote to cover a short fall in the debt service.

Testopedia explains Moral Obligation Bond

When a bridge or a toll road is financed through the sale of municipal revenue bonds the debt service is supported by the toll revenue. If the revenue generated is not sufficient to support the debt the issuer may default. The state or municipality in which the facility is located may elect to vote to cover the debt service shortfall. There is no obligation for the state or municipality to cover the shortfall. If the issuer was allowed to default it could raise interest rates for the state and municipal issuers where the project is located as the perceived risk of those issuers rise. This fact is the basis for the moral obligation and the rationale for why a state or municipality would vote to cover the shortfall.

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