Build America Bonds (BABs)

Build America Bonds BABs Municipal Bonds Taxable Bonds Infrastructure American Recovery and Reinvestment Act of 2009 Public Finance Economic Stimulus
Taxable bonds issued by municipalities and designed to encourage spending on infrastructure and create jobs. The issuance of these bonds was authorized by the American Recovery and Reinvestment Act of 2009, and the program ended on December 31, 2009.
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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

  1. City Infrastructure Projects: Municipalities issued BABs to finance major infrastructure projects such as highway construction, public transit improvements, and school building renovations.
  2. Water Supply Upgrades: Local governments used proceeds from BABs to upgrade water treatment plants and expand sewer systems.
  3. 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.

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

  1. Investopedia on BABs
  2. Wikipedia on BABs
  3. Sec.gov on BABs

Suggested Books for Further Studies

  1. “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.

  2. “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.

  3. “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

### What is a Build America Bond (BAB)? - [ ] A type of corporate bond. - [x] A taxable municipal bond. - [ ] A federal government bond. - [ ] A tax-exempt municipal bond. > **Explanation:** Build America Bonds are taxable municipal bonds issued to finance public infrastructure projects with federal subsidies. ### What legislation authorized the issuance of Build America Bonds? - [ ] The Tax Cuts and Jobs Act of 2017 - [x] The American Recovery and Reinvestment Act of 2009 - [ ] The Dodd-Frank Act - [ ] The Affordable Care Act > **Explanation:** The American Recovery and Reinvestment Act of 2009 authorized the issuance of Build America Bonds to stimulate economic growth during the Great Recession. ### When did the Build America Bonds program end? - [x] December 31, 2009 - [ ] December 31, 2019 - [ ] December 31, 2020 - [ ] December 31, 2008 > **Explanation:** The Build America Bonds program ended on December 31, 2009. ### Which of the following is true about the federal subsidy in Build America Bonds? - [ ] It provides a rebate on property taxes. - [ ] It is a grant for state education funding. - [ ] It eliminates interest payments entirely. - [x] It provides either tax credits to bondholders or direct payments to issuers. > **Explanation:** The federal subsidy associated with Build America Bonds offers either tax credits to bondholders or direct payments to bond issuers. ### What was a primary goal of issuing Build America Bonds? - [ ] Reducing the housing market bubble. - [x] Stimulating infrastructure investment. - [ ] Reforming health care systems. - [ ] Regulating banking activities. > **Explanation:** Build America Bonds aimed to stimulate infrastructure investment and create jobs, which was particularly important during the economic downturn. ### Are interest payments on Build America Bonds tax-exempt? - [ ] Yes, for all bondholders. - [ ] Yes, but only for institutional investors. - [x] No, they are taxable. - [ ] Yes, if the bonds are held until maturity. > **Explanation:** Interest payments on Build America Bonds are taxable, which differentiates them from traditional municipal bonds. ### Can municipalities still issue new Build America Bonds today? - [ ] Yes, they can issue them annually. - [ ] Only for special projects. - [x] No, the program ended in 2009. - [ ] Yes, with federal approval. > **Explanation:** Municipalities can no longer issue new Build America Bonds since the program ended on December 31, 2009. ### What types of projects were typically financed using Build America Bonds? - [x] Infrastructure projects like highways and schools. - [ ] Private beach resorts. - [ ] International business ventures. - [ ] Foreign aid programs. > **Explanation:** Build America Bonds were used to finance infrastructure projects such as highways and schools. ### Who benefits from the federal subsidies provided under the Build America Bonds program? - [ ] Only the state government. - [x] Both bondholders and bond issuers. - [ ] Foreign governments. - [ ] Corporate investors. > **Explanation:** Federal subsidies benefit both bondholders, through tax credits, and bond issuers, through direct payments. ### Why were Build America Bonds made taxable? - [ ] To decrease demand for municipal bonds. - [x] To attract a broader investor base including those not interested in tax-free investments. - [ ] To reduce federal budget deficits. - [ ] To support foreign policy objectives. > **Explanation:** Making Build America Bonds taxable helped attract a broader investor base including institutional and foreign investors not interested in tax-free investments.

Thank you for exploring Build America Bonds and test your knowledge through our comprehensive quiz. Continue enhancing your understanding of public finance and economic stimulus measures!

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