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Moral Obligation Bond

Moral Obligation Bond is the category of US municipal bonds, a subtype of “revenue bonds”, issued with the optional clause that additional provision may be made to fund the debt in the event of payment default. Like revenue bonds, they are usually issued for a specific project, and in the event of an insufficient revenue stream from the implemented project, the issuer undertakes not to use tax revenues to finance payments. The difference and peculiarity of this type of securities is an informal, "moral" obligation, in accordance with which the issuer, in the absence of sufficient yield of the project, is obliged to look for other, non-tax ways to secure them. The risk of non-fulfillment of a moral obligation is based on a potential downgrade in the credit rating of a municipality or similar authority. At the same time, the investor bears the risk of losing all invested funds, as a result of the low yield of the project. For an investor-resident of the territory controlled by the municipality, such bonds may be interesting for two reasons: firstly, income on such securities is not subject to most taxes; secondly, investors, due to the higher risk of the paper, receive a higher return than ordinary municipal bonds.
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