Underlying Debt

The concept of the underlying debt is related to the municipal bonds. The underlying debt is an assurance or an understanding that is implicitly associated with the municipal bonds. According to this assurance or understanding means that the debt of the small government entities must be backed or assured by the trustworthiness of the large and stable government entities. This creditworthiness is guaranteed by the jurisdiction that means the municipal bonds are backed by the stable government entities. The smaller financial entities may not have ability to raise funds on their own so if they are backed by the more stable entities it will be easy to enjoy a robust financial plan for the smaller entities. However if the stable and financial strong are backing the debt issuing facilities of the smaller entities the smaller entities must obtain low interest rates on their issued debts. This makes municipal bond as an underlying debt instrument.

The situation where the municipal bonds issued by the smaller government entities are backed by the larger and more stable government entities is a very common situation. Most commonly this situation arises when the schools and small district bodies need to raise funds for the operations and other larger initiatives within the area of interest. If the smaller entity is unable to pay the debts it will not happen that the school or the district bodies will dissolve or stop working rather the larger government bodies will pay the debt off on their behalf.


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