Build America Bonds (BABs)

Build America Bonds (BABs)

What are Build America bonds?

Build America Bonds (BABs) were taxable municipal bonds that included federal tax credits or subsidies for bondholders or issuers of state and local governments. Build America Bonds (BABs) were introduced in 2009 as part of President Obama’s American Obama Recovery and Reinvestment Act (ARRA) to create jobs and stimulate the economy. The Build America Bonds program expired in 2020.

The Build America Bonds program expired in 2020.

Understanding Build America Bonds (BAB)

Many investors were afraid to invest in something other than federal government bonds right after the 2008 financial crisis. Investors even avoided municipal bonds. The federal government introduced Build America Bonds (BAB) to ensure that local municipalities and counties were able to raise much-needed capital during the recession.

BABs have been introduced to encourage investment in local areas. BABs were debt securities issued by a state, municipality or county to finance capital expenditures. The interest rates on these bonds have been subsidized by the federal government, which has reduced the cost of borrowing for infrastructure projects for state and local governments.

In addition, investors at that time were more likely to opt for a bond issued by a government agency. Corporate bonds presented a high perceived risk of default immediately after the 2008 financial crisis.

Types of Build America Bonds (BAB)

In general, there were two distinct types of BABs: tax credit BABs and direct payment BABs. The BAB tax credit offered bondholders and lenders a federal subsidy of 35% of the interest paid through refundable tax credits, thereby reducing the tax liability of bondholders. If the bond holder’s tax liability was insufficient to use the entire credit, it could be carried over to future years.

Direct payment BABs offered a similar subsidy, but it was paid to the bond issuer. The US Treasury made a direct payment to Build America Bond issuers in the form of a subsidy of 35% of the interest they owed to investors. As the effective cost of borrowing fell for issuers, they were able to offer the bonds to investors at competitive rates on the markets. BAB’s $ 5.2 billion issue in California in early 2009, for example, offered investors an interest rate of 7.4%. The state only had to pay 4.8% of this interest and the federal government paid the rest.

Restrictions on Build America Bonds (BAB)

Some traditionally tax-exempt issuers, such as private issuers and 501 (c) (3) organizations, were not eligible to use the BAB program. In addition, the program was only open to new capital expenditure bonds issued before January 1, 2020. BABs could not be issued to refinance old debts.

KEY POINTS TO REMEMBER

  • Build America Bonds (BABs) were taxable municipal bonds that included federal tax credits or subsidies for bondholders or issuers of state and local governments.
  • The Build America Bonds program expired in 2020.
  • The federal government introduced Build America Bonds (BAB) to ensure that local municipalities and counties were able to raise much-needed capital during the recession.
  • In general, there were two distinct types of BABs: tax credit BABs and direct payment BABs.

Build US bonds against traditional Muni bonds

The difference between Build America bonds and traditional municipal bonds is that the income generated by ordinary regular bonds is exempt from federal and certain state taxes. With BABs, interest income was taxable at the federal level.

Leave a Comment

Your email address will not be published. Required fields are marked *