Broadly speaking, it is the borrower’s ability to fulfill current and future debt obligations by making timely principal and interest payments out of his/ its earnings or other sources of incomes. Typically, banks and financial institutions adjust repayment schedules for borrowers as necessary to accommodate their ability to pay.

In connection with municipal bonds, ability to pay denotes an issuer’s current and future ability to generate enough tax revenue that would allow it to meet its contractual obligations, taking into consideration all relevant factors, including property values, municipal income, etc.