Build America Bonds (BABs)

What Are Build America Bonds?

Build America Bonds (BABs) were taxable municipal bonds that highlighted federal tax credits or appropriations for bondholders or state and nearby government bond issuers. Build America Bonds (BABs) were presented in 2009 as part of President Obama's American Recovery and Reinvestment Act (ARRA) to make occupations and animate the economy. The Build America Bonds program expired in 2010.

The Build America Bonds program expired in 2010.

Understanding Build America Bonds (BABs)

Numerous savers were reluctant to invest in something besides federal government bonds right after the 2008 financial crisis. Investors were even avoiding municipal bonds. The federal government presented Build America Bonds (BABs) to guarantee that neighborhood municipalities and counties had the option to raise truly necessary capital during the recession.

BABs were acquainted with support investment in neighborhoods. BABs were debt securities issued by a state, municipality, or province to finance capital expenditures. The interest rates on these bonds were subsidized by the federal government, which made the cost of borrowing for infrastructure projects lower for state and neighborhood governments.

Likewise, investors around then were bound to opt for a bond issued by a government body. Corporate bonds had a high perceived default risk promptly following the 2008 financial crisis.

Types of Build America Bonds (BABs)

As a general rule, there were two distinct types of BABs: tax credit BABs and direct payment BABs. Tax credit BABs offered bondholders and lenders a 35% federal subsidy of the interest paid through refundable tax credits, lessening the bondholder's tax liability. In the event that the bondholder's tax liability was lacking to utilize the whole credit, it very well may be carried forward to future years.

The direct payment BABs offered a comparable subsidy, yet it was paid to the bond issuer. The U.S. Treasury made a direct payment to Build America Bond issuers as a 35% subsidy of the interest they owed to investors. Since the effective cost of borrowing succumbed to issuers, they had the option to offer the bonds to investors at competitive rates in the markets. California's $5.2 billion BAB issue in mid 2009, for instance, offered an interest rate of 7.4% to investors. The state just needed to pay 4.8% of that interest, and the federal government paid for the rest.

Limitations on Build America Bonds (BABs)

A few traditionally tax-exempt issuers, like private party issuers and 501(c)(3) organizations, were not eligible to utilize the BAB program. Likewise, the program was simply open to new issue capital expenditure bonds issued before Jan. 1, 2011. BABs couldn't be issued for refinancing old debts.

Build America Bonds versus Traditional Muni Bonds

The difference between Build America Bonds and traditional municipal bonds is that income generated from standard muni bonds is exempt from federal and some state taxes. With BABs, the interest income was subject to tax at the federal level.

Highlights

• The Build America Bonds program expired in 2010.
• The federal government presented Build America Bonds (BABs) to guarantee that nearby municipalities and counties had the option to raise genuinely necessary capital during the recession.
• Build America Bonds (BABs) were taxable municipal bonds that highlighted federal tax credits or appropriations for bondholders or state and nearby government bond issuers.
• As a rule, there were two distinct types of BABs: tax credit BABs and direct payment BABs.