Build America Bonds are taxable municipal bond

Municipal bond

A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any...

s that carry special tax credits 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 that U.S. President Barack Obama

Barack Obama

Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...

 signed into law on February 17, 2009. The program expired December 31, 2010.

Purpose of and eligibility for Build America Bonds

The purpose of Build America Bonds is to reduce the cost of borrowing for state and local government issuers and governmental agencies

Government agency

A government or state agency is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types...

. Some traditionally tax-exempt issuers, such as private party issuers and 501(c)(3) organizations, are not eligible to use the Build America Bond program. Currently, the program is only open to new issue capital expenditure bonds

Bond (finance)

In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

 issued before January 1, 2011.

Build America Bonds can provide states and localities with substantial savings on their borrowing costs. According to the United States Department of the Treasury

United States Department of the Treasury

The Department of the Treasury is an executive department and the treasury of the United States federal government. It was established by an Act of Congress in 1789 to manage government revenue...

, the savings for a 10 year bond are estimated to be 31 basis points 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." The Direct Payment BABs provide a federal subsidy of 35% of the interest paid on the bonds to the issuer. The Tax Credit BABs provides a federal subsidy as a refundable tax credit directly to the bondholders. While the bondholder is the recipient of the tax credit through Tax Credit BABs, and the bond issuer is the recipient of the tax subsidy through Direct Payment BABs, both options reduce the cost of borrowing for the bond issuer in comparison to traditional taxable corporate bonds, and in many cases, it is more cost effective than issuing traditional tax-exempt bonds.

Investors

While Build America Bonds are taxable fixed income

Fixed income

Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....

 securities, the biggest holders include both traditional and non-traditional municipal bond holders. The largest buyers include insurance companies

Insurance

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

, mutual funds, foreign central banks, and foreign commercial banks.

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.