Build America Bonds

by Cara Scatizzi

Build America Bonds (BABs) are new taxable municipal bonds that were authorized in February under the American Recovery and Reinvestment Act of 2009.

These new bonds allow state and local governments to issue taxable bonds in 2009 and 2010 for government capital projects; the issuers receive a direct subsidy payment from the U.S. Treasury for a portion of their borrowing costs. The intent is to provide municipal issuers access to a broader market of buyers, such as tax-exempt and lower-tax-bracket investors. In turn, these investors now have a new bond option—municipal bonds that pay an interest rate that is competitive with other taxable issues, such as corporate bonds.

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About the author

Cara Scatizzi is a former associate financial analyst at AAII.
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How It Works

BABs were created to help state and local governments finance capital projects at a lower cost due to the government subsidization of interest paid. The interest subsidy is a rate of 35%. The hope is that issuers will create new jobs and stimulate the economy with new projects.

Issuers are only allowed to use the proceeds from these bonds for government capital projects. These kinds of projects create public infrastructure like public schools, roads, transportation infrastructure and public buildings. Private companies cannot issue these bonds.

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→ Cara Scatizzi is a former associate financial analyst at AAII.

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