Definition
An Industrial Development Bond (IDB) is a form of debt issued by a municipality to finance the acquisition, construction, or improvement of industrial facilities. The primary goal of these bonds is to promote economic development within the local community. Once the assets are financed, they are typically leased to private industrial businesses, which contribute to job creation and economic growth.
Key Features
- Issuer: Typically a municipality or a local government entity.
- Purpose: To finance the development of industrial facilities.
- Lease Agreement: Assets are usually leased to private businesses.
- Repayment: The private business leasing the asset is usually responsible for repaying the debt.
Examples
- City of Smalltown IDB: Smalltown decides to issue an IDB to construct a new manufacturing plant. The plant is leased to a private company specializing in automotive parts, boosting local employment.
- County of Greenfield IDB: Greenfield County issues an IDB to upgrade local industrial parks. These improved facilities attract technology companies, fostering a tech boom in the area.
- Metro City IDB: Metro City issues an IDB for building an expansive industrial warehouse, leased to a logistics firm, thereby enhancing the city’s logistics and supply chain capabilities.
Frequently Asked Questions
What are the benefits of Industrial Development Bonds?
- Economic Growth: Promotes local economic development by attracting private businesses.
- Job Creation: Boosts employment through the establishment of new industrial facilities.
- Tax-Exempt Status: Often comes with tax-exempt benefits for the bondholders.
How does an Industrial Development Bond differ from a regular municipal bond?
- Unlike regular municipal bonds, which predominantly finance public projects, IDBs specifically finance projects leased to private businesses.
Are Industrial Development Bonds risk-free?
- No, while IDBs often enjoy tax benefits and municipal backing, they are subject to risks related to the creditworthiness of the private business lessees.
Who can invest in Industrial Development Bonds?
- Typically, institutional investors, but some issues may be available to individual investors.
What kind of projects can be funded by Industrial Development Bonds?
- Projects including the development of manufacturing plants, warehouses, and other industrial facilities.
Related Terms
Municipal Bond
A debt security issued by a state, municipality, or county to finance its capital expenditures, such as the construction of highways, bridges, or schools.
Revenue Bond
A type of municipal bond that is not backed by the government’s taxing power but by the revenue from a specific project or source.
Lease Revenue Bond
A municipal bond backed by lease payments made by lessees leasing facilities financed by the bonds.
Economic Development
Efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes.
Private Activity Bond
A category of tax-exempt municipal bonds that are issued to provide financing for private activities such as industrial development, student loans, and affordable housing.
Useful Online Resources
- Municipal Securities Rulemaking Board (MSRB)
- Investopedia - Industrial Development Bonds
- Securities and Exchange Commission (SEC)
Suggested Books for Further Studies
- “Municipal Bonds: The Basics and Beyond” by Sylvan G. Feldstein
- “The Handbook of Municipal Bonds” by Sylvan G. Feldstein and Frank J. Fabozzi
- “Tax-Exempt Bonds: A Comprehensive Study on the Fundamentals of and Innovations in Bond Financing” by Steve Piecek
Accounting Basics: Industrial Development Bond Fundamentals Quiz
### What is the primary purpose of an Industrial Development Bond?
- [ ] To finance public schools
- [x] To promote local economic development
- [ ] To pay municipal salaries
- [ ] To fund healthcare facilities
> **Explanation:** The primary purpose of an Industrial Development Bond is to promote local economic development by financing commercial and industrial facilities for private businesses.
### Who typically issues Industrial Development Bonds?
- [x] Municipalities
- [ ] Private corporations
- [ ] Federal government
- [ ] Non-profit organizations
> **Explanation:** Industrial Development Bonds are typically issued by municipalities to encourage local economic development.
### What is one major benefit for investors in Industrial Development Bonds?
- [ ] High yields
- [x] Tax-exempt income
- [ ] Risk-free returns
- [ ] Early retirement option
> **Explanation:** One major benefit for investors in Industrial Development Bonds is the tax-exempt income they can provide.
### What type of leasing agreement is typically associated with Industrial Development Bonds?
- [x] Lease agreement with private businesses
- [ ] Long-term public contracts
- [ ] Leasing from federal entities
- [ ] Residential leasing
> **Explanation:** The assets financed by Industrial Development Bonds are typically leased to private businesses under a lease agreement.
### Which type of risk is most associated with Industrial Development Bonds?
- [ ] Operational risk
- [ ] Inflation risk
- [ ] Geopolitical risk
- [x] Credit risk
> **Explanation:** The risk most associated with Industrial Development Bonds is credit risk, given the reliance on private business lessees to repay the bonds.
### How does an Industrial Development Bond support job creation?
- [x] By financing facilities that generate employment
- [ ] By directly paying workers
- [ ] Through government subsidies
- [ ] By reducing taxes
> **Explanation:** Industrial Development Bonds support job creation by financing facilities that generate employment in local areas.
### Can individual investors purchase Industrial Development Bonds?
- [x] Yes, in some cases
- [ ] No, only institutions can invest
- [ ] Only the federal government can invest
- [ ] They must be purchased through mutual funds
> **Explanation:** Though typically favored by institutional investors, certain issues of Industrial Development Bonds may be available to individual investors.
### What ensures the repayment of an Industrial Development Bond?
- [ ] A federal guarantee
- [ ] A municipal tax revenue
- [ ] A state government reserve
- [x] The creditworthiness of the private business leasing the asset
> **Explanation:** The repayment of an Industrial Development Bond relies on the creditworthiness of the private business leasing the asset.
### Which of the following is a typical example of a project funded by Industrial Development Bonds?
- [ ] Building a public school
- [ ] Expanding a city park
- [x] Constructing a manufacturing plant
- [ ] Developing a residential area
> **Explanation:** Constructing a manufacturing plant is a typical example of a project funded by Industrial Development Bonds. These bonds are intended to support industrial development projects.
### What category of municipal bonds does an Industrial Development Bond belong to?
- [ ] General obligation bonds
- [x] Private activity bonds
- [ ] Zero-coupon bonds
- [ ] Serial bonds
> **Explanation:** Industrial Development Bonds fall under the category of private activity bonds, typically financing projects benefiting private entities rather than public use.
Thank you for exploring the complex yet rewarding world of Industrial Development Bonds. For further studies, please consult the provided online resources and suggested readings. Happy learning!
