Final answer:
Debt issued by an entity and backed by another's promise to cover any shortfalls is known as moral obligation debt. It involves a moral pledge for support and is different from other types of debt, such as corporate bonds or public debt where repayment terms are legally binding between the borrower and lender. The correct answer is moral obligation debt.
Step-by-step explanation:
Debt that is issued by one entity but backed by the promise of another entity to make up any debt service deficiency is known as moral obligation debt. This type of debt relies on a moral pledge rather than a legal requirement to provide additional support if necessary.
In the context of public finance, moral obligation bonds are typically issued by a municipality or other governmental entity that has the morally, but not legally, binding pledge of another entity, often a state government, to cover the debt payments if the issuer cannot. The concept of a corporate bond also involves a promise made by the bond issuer to make certain payments over time.
The characteristic of moral obligation debt stands in contrast to other types of debt, such as debt held by government trust funds, or bonds supported by the full faith and credit of the issuer. Governmental entities often deal with various debt instruments, including public debt, where the government owes to itself, which does not affect the economy in the same manner as private debt. Bonds, whether issued by corporations or governments, represent a contractual agreement between the borrower and the lender, where repayment of the borrowed amount plus interest is expected by the bondholders.