Definition
Build America Bonds (BABs) are taxable municipal bonds that were created under the American Recovery and Reinvestment Act of 2009 (ARRA) to stimulate investment in infrastructure projects and create jobs. Unlike traditional municipal bonds, which are usually tax-exempt, BABs are taxable, but they offer federal subsidies either in the form of tax credits to bond purchasers or direct payments to issuers.
Examples
- City Infrastructure Projects: Municipalities issued BABs to finance major infrastructure projects such as highway construction, public transit improvements, and school building renovations.
- Water Supply Upgrades: Local governments used proceeds from BABs to upgrade water treatment plants and expand sewer systems.
- Public Housing Developments: Some cities leveraged BABs to fund the construction and renovation of affordable housing units.
Frequently Asked Questions
What are Build America Bonds?
Build America Bonds (BABs) are taxable municipal bonds issued by state and local governments to finance public projects with the backing of federal subsidies.
How do the federal subsidies work?
The federal government provides either a direct payment subsidy to the issuer or a tax credit to the bondholder, making BABs attractive despite their taxable status.
Why were BABs created?
BABs were created under the American Recovery and Reinvestment Act of 2009 to stimulate economic activity by financing infrastructure projects and creating jobs during the Great Recession.
Did the BABs program have an expiration date?
Yes, the issuance of Build America Bonds was limited to the period between April 2009 and December 31, 2009.
Are BABs still available for issuance?
No, the program ended on December 31, 2009, and no new BABs can be issued. However, existing BABs can still be traded in the secondary market.
Related Terms
Municipal Bonds
Municipal bonds, or “munis,” are debt securities issued by states, municipalities, or counties to finance public projects. These bonds are typically tax-exempt.
Taxable Bonds
Taxable bonds are debt securities that require the bondholder to pay taxes on the interest income. Examples include corporate bonds and Build America Bonds.
American Recovery and Reinvestment Act of 2009 (ARRA)
The American Recovery and Reinvestment Act of 2009 was a stimulus package enacted by Congress to combat the economic downturn caused by the Great Recession, which included provisions for Build America Bonds.
Subsidized Bonds
Subsidized bonds are bonds that receive some form of financial support from the government, typically to reduce the cost of borrowing for the issuer.
Online References
Suggested Books for Further Studies
“Municipal Bond Market Basics” by Frank J. Fabozzi
An in-depth examination of the municipal bond market, including a section on taxable bonds like BABs.“The Handbook of Municipal Bonds” by Sylvan G. Feldstein and Frank J. Fabozzi
A comprehensive guide to municipal bonds, covering their issuance, regulation, and distinctive types.“Mania, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger and Robert Z. Aliber
This book provides context to economic stimulus measures like BABs within a historical framework of financial crises.
Fundamentals of Build America Bonds (BABs): Public Finance Basics Quiz
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