Build America Bonds (BABs)
What Are Build America Bonds and How Do They Work?
Build America Bonds (BABs) were taxable municipal bonds that offered investors or state and local government bond issuers federal tax credits or subsidies. Build America Bonds (BABs) were first established in 2009 as part of President Barack Obama's American Recovery and Reinvestment Act (ARRA), which aimed to boost the economy and generate employment. In 2010, the Build America Bonds programme came to an end.
IMPORTANT :In 2010, the Build America Bonds programme came to an end.
Understanding Bonds to Build America (BABs)
Following the 2008 financial crisis, many people were hesitant to invest in anything other than federal government bonds. Municipal bonds were also avoided by investors. Build America Bonds (BABs) were created by the federal government to help local governments and counties generate much-needed funding during the crisis.
BABs were implemented to stimulate local investment. BABs were debt instruments used to fund capital expenditures by a state, municipality, or county. The federal government subsidised the interest rates on these bonds, lowering the cost of borrowing for infrastructure projects for state and municipal governments.
Furthermore, investors at the time were more inclined to choose a government-issued bond. Following the financial crisis of 2008, corporate bonds were seen as having a significant default risk.
Build America Bonds come in a variety of shapes and sizes (BABs)
BABs were divided into two categories: tax credit BABs and direct payment BABs. Tax credit BABs provided bondholders and lenders with a government subsidy of 35 percent of the interest paid in the form of refundable tax credits, lowering the bondholder's tax burden. The credit might be carried over to future years if the bondholder's tax burden was inadequate to exhaust the whole credit.
Payment through direct debit A comparable subsidy was given by BABs, but it was paid to the bond issuer. The US Treasury provided a direct payment to Build America Bond issuers in the form of a 35 percent interest subsidy. Because issuers' effective cost of borrowing reduced, they were able to sell bonds to investors at market-competitive rates. 2 Investors in California's $5.2 billion BAB offering in early 2009, for example, were offered a 7.4 percent interest rate. The state only had to pay 4.8 percent of the interest, with the rest covered by the federal government.
Build America Bonds are subject to restrictions (BABs)
The BAB programme was not available to some historically tax-exempt issuers, such as private party issuers and 501(c)(3) organisations.
4 The programme was also limited to new capital expenditure bonds issued prior to January 1, 2011. BABs could not be used to refinance existing debt. 5
TAKEAWAYS IMPORTANT
Build America Bonds (BABs) were taxable municipal bonds that offered investors or state and local government bond issuers federal tax credits or subsidies.
In 2010, the Build America Bonds programme came to an end.
Build America Bonds (BABs) were created by the federal government to help local governments and counties generate much-needed funding during the crisis.
BABs were divided into two categories: tax credit BABs and direct payment BABs.
Traditional Muni Bonds vs. Build America Bonds
The distinction between Build America Bonds and standard municipal bonds is that normal muni bond income is tax-free in the United States and in some states. The interest income from BABs was taxed at the federal level. 6
