James Chen, CMT is an expert trader, investment adviser, và global market strategist. He has authored books on technical analysis và foreign exchange trading published by John Wiley và Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among mỏi other financial media." data-inline-tooltip="true">James Chen

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What is Underlying Debt?

Underlying debt is a municipal bond term that relates lớn an implicit understanding that the debt of smaller governmententities might have backing from the creditworthiness of larger governmententities in the jurisdiction.

Underlying debt is a municipal bond term that reflects an implicit understanding that debt of smaller government entities may be backed by the creditworthiness of larger government entities.Underlying debt applies khổng lồ general obligation municipal bonds.If a smaller entity is having trouble meeting its obligations, the rating of the larger entity carrying the underlying debt can be negatively impacted.

Understanding Underlying Debt

On their own, these smaller entities might have a hard time raising funds if they don't have sầu a robust financial position. However, the implicit backing of larger entities facilitates borrowing by smaller entities and allows them to obtain lower interest rates on their obligations. People consider the municipal bonds to lớn be the underlying debt of the backing entity.

The underlying debt situation of smaller municipal debts being implicitly backed by larger governmental entities is quite comtháng in practice. This occurs where smaller entities like cities và school districts offer bonds khổng lồ the public to finance operations and new initiatives. If a smaller entity is unable to lớn repay its debts, it is unlikely that the thành phố or school district will simply be allowed khổng lồ become insolvent and cease operations. Rather it is expected that the state will intervene to provide emergency funding to continue debt service and maintain essential services.

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Underlying debt applies khổng lồ general obligation municipal bonds, which are backed by the taxing authority of the issuer or, in the case of underlying debt, the authority of the larger government entity. This sharing of credit responsibilities generally acts asa creditenhancement for thebond issuer. When ratings agencies such as Standard và Poor’s và Moody’s assign an underlying rating for these issuers, the ratings reflect the characteristics of the issuer on a standalone basis.

In addition, the carrying of underlying debt is considered in the rating of larger municipal issuers, specifically their ability khổng lồ meet all financial obligations, including underlying debt, & lớn make scheduled interest payments on time. If a smaller entity is having trouble meeting its obligations, the rating of the larger entity carrying the underlying debt can be negatively impacted.

Examples and Risks of Underlying Debt

Separate municipalities within a thành phố or country may issue their own debt obligations to finance projects such as hospitals, roads, schools or sanitation facilities. In many cases, the thành phố or county carries these obligations as underlying debt. This is the case in Illinois, where the state relies on the taxing authority of the legislature to lớn baông chồng bonds issued by Chicago.

Underlying debt can create additional risks for the larger entity backing the debt as was the case in the state of Thủ đô New York in the 1970s when Thành Phố New York City nearly went insolvent. requires writers to use primary sources to support their work. These include Trắng papers, government data, original reporting, và interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.