What are moral obligation bonds?

Moral obligation bonds are a specific type of debt instrument issued by state or local governments that are not legally binding in terms of repayment but are backed by a moral commitment from the issuing authority. They typically rely on the projected revenues that are expected to be generated from a specific project or revenue source.

In practice, if the specific revenue does not meet the obligations for repayment, the governing body can choose to utilize its resources to cover any shortfalls, which creates a moral obligation to repay bondholders. This is why the nature of these bonds is described as being supported by "projected revenue backing." Investors in these bonds understand that while there is no legal mandate for the government to use its tax revenues for repayment, there is an expectation that it will honor this debt to maintain its creditworthiness and uphold its reputation, thus ensuring investor confidence.

This distinction makes moral obligation bonds different from those that are legally mandated or strictly backed by taxation, as these other types typically have more definitive repayment frameworks and obligations.