Your hometown has several blocks of emptied-out old factories and burned-out buildings. You want to build a high-end outdoor mall, a shopping experience combined with amenities like a water park and a ferris wheel. You hope it will draw in potential tourists from surrounding areas.
Your local government thinks it’s a great idea. They think it’s a wonderful way to revitalize downtown. You want them to invest some of the town's money in the project, but they don’t have anything to offer. (A town with a bunch of burned-out buildings in its downtown typically doesn't have cash for water slide construction.)
One compromise step you can take involves private activity bonds. These debt securities carry some of the benefits of municipal bonds, such as tax exempt status. However, the money goes to private investors, like you. They are not explicitly backed by a government. You'll still have to pay back all the money, and any default falls on you. The government isn't promising to use tax revenue to service the debt. But, while you have to carry the burden of the debt, you get the market benefits of having the pseudo-government's help.
Related or Semi-related Video
Finance: What is a Moral Obligation Bond...7 Views
Finance allah shmoop what is a moral obligation bond So
one of our writers totally messed this one up and
we started a video about promises to pay dentists So
a moral obligation bond is one that gets paid because
well you have good morals or you feel morally obligated
to pay hey if you don't necessarily legally have to
pay it but you're morally obligated Teo do so let's
think about this Hospitals universities do gooder projects of all
shapes and sizes that is on a lone dusty highway
west of omaha a tiny city wants to build a
trucker parking hub with excellent hot dogs clean ish showers
and a mud flap emporium They need three million bucks
to build this thing for the kindly loving truckers while
it's still human beings doing nothing and well on their
own city can't afford it the state realizing how good
this depot would be for commerce in business coming into
and out of the state they decide to guarantee the
bonds of that little city The city is backing it
without reams of paper a forest full of paper sign
contracts or any other major structural legal limits in practice
The bonds air publicized as a gift to the area
and they create extreme embarrassment to the politicos who backed
it Should that bond ever fail That is whoever's managing
the facility and supposed to collect the you know shower
tuition from the truckers stops collecting it and or the
truckers find somewhere else to go with mohr cleanest showers
or this is a municipal moral obligation bond but the
term applies to bonds that are not government backed as
well The holy rollers church of greater baltimore is raising
money to replace all the stained glass windows that have
been broken by you know errant baseball's from the neighboring
field They get each of their congregants toe loan the
church three grand and no they're not passing contracts along
with the collection plate there's nothing in writing saying that
the church will use that money to replace the windows
they promised or because the members let the church get
their dough back The church has a moral obligation to
pay back the money that they were loaned to make
good on their promise and if they default well they'll 00:02:10.823 --> [endTime] have to answer to the big guy in charge
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