Build America Bonds are taxable

municipal bond A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often, ...

s that carry special

tax credits A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state "disc ...

and federal subsidies for either the bond issuer or the bondholder. Build America Bonds were created under Section 1531 of Title I of Division B of the

American Recovery and Reinvestment Act American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the "United States" or "America" ** Americans, citizens and nationals of the United States of America ** American ancestry, pe ...

that U.S. President

Barack Obama Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...

signed into law on February 17, 2009.
Internal Revenue Service.
IRS Issues Guidance on New Build America Bonds
Retrieved on December 12, 2016. The program expired December 31, 2010.

Purpose of and eligibility for Build America Bonds

The purpose of Build America Bonds, commonly referred to as BABs, is to reduce the cost of borrowing for state and local government issuers and government agency, governmental agencies. Some traditionally tax-exempt issuers, such as private party issuers and

501(c)(3) A 501(c)(3) organization is a United States corporation, trust, unincorporated association or other type of organization exempt from federal income tax under section 501(c)(3) of Title 26 of the United States Code. It is one of the 29 types of 50 ...

organizations, were not eligible to use the Build America Bond program. The program was only open to new issue capital expenditure bonds issued before January 1, 2011; BABs could not be issued for refinancing transactions. Build America Bonds can provide states and localities with substantial savings on their borrowing costs. According to the United States Department of the Treasury, the savings for a 10-year bond are estimated to be 31

basis point A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. The related term ''permyriad'' means one hundredth of 1 percent. Changes of interest rates are often stated in basis points. If ...

s and the savings for a 30-year bond are estimated to be 112 basis points versus traditional tax-exempt financing.

Types of Build America Bonds

There are two types of Build America Bonds (often abbreviated as ''BABs''): "Tax Credit BABs" and "Direct Payment BABs."Internal Revenue Service.
Notice 2009-26, Part III: Build America Bonds and Direct Payment Subsidy Implementation
Retrieved on May 31, 2009. The Direct Payment bonds provide a subsidy of 35% of the interest, paid to the issuer. The Tax Credit bonds provides a refundable tax credit directly to the bondholders. While the bondholder is the recipient of the tax credit through Tax Credit bond, and the bond issuer is the recipient of the tax subsidy through Direct Payment bond, both options reduce the cost of borrowing for the issuer in comparison to traditional taxable

corporate bonds A corporate bond is a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. The term is usually applied to longer-term debt instruments, with maturity o ...

; in many cases, it is more cost effective than issuing traditional tax-exempt bonds.

Investors

While Build America Bonds are taxable fixed income securities, the biggest holders include both traditional and non-traditional municipal bond holders. The largest buyers include insurance companies, mutual funds, foreign

central banks A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central ...

, and foreign

commercial banks A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with corp ...

Issuance

From the time of the program's inception in April 2009, through the end of the program at the end of 2010, a total of US$181 billion of Build America Bonds were issued.{{Cite press release , title = Treasury Recovery Act - Build America Bonds Data , publisher = United States Department of the Treasury , date = 2010-12-06 , url = http://www.treasury.gov/initiatives/recovery/Pages/babs.aspx , accessdate = 2010-12-17 , archive-url = https://web.archive.org/web/20101218032613/http://www.treasury.gov/initiatives/recovery/Pages/babs.aspx , archive-date = 2010-12-18 , url-status = dead

References

Government bonds issued by the United States Local government in the United States

Purpose of and eligibility for Build America Bonds

Types of Build America Bonds

Investors

Issuance

See also

References