Underlying Debt

For municipal bonds, an underlying debt is the debt held by a government entity which exists in the jurisdiction of a larger entity. The larger entity (such as a state) understands the underlying debt as belonging to the smaller entity (such as a city). Even though the underlying debt is held by the smaller entity, both share the credit responsibilities – after all, the larger entity is likely to be more creditworthy than its smaller counterpart. Underlying debt shouldn’t be confused with overlapping debt, which is debt that exists with equally ranked entities. In a different sense, an underlying debt also refers to an original loan that still exists. This underlying debt may be owed on a mortgage, for example.

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