Common Questions and Answers
Who can issue these bonds?
Any state or local government; cannot be for private activity and cannot be for not-for-profits
What can they be used for?
For new governmental capital expenditure; cannot be for refunding outstanding bonds; cannot be for working capital
How are they subsidized by the feds?
Issuer sells taxable bonds and the US Treasury pays the issuer 35% of the interest cost when due. (See example below)
What are the benefits?
The issuer's interest cost on taxable bonds is reduced by 35% direct federal subsidy
Are there special reporting requirements?
Election to issue BABs must be made on or before the issue date. Otherwise, same information requirements as tax-exempt state or local government bonds
How long will these bonds be available?
BABs must be issued before 1/1/2011
Is there a cap?
Where can I find more information?
Section 1531 of ARRTA; Limited Interim Guidance Issued 4/3/2009; US Treasury website
What else should I know?
go to http://mass.gov/recovery/finance for more information related to Municipal Finance Opportunities under ARRA.
Example: Traditional tax-exempt bonds compared with Build America Bonds (Direct Payment)
- a $10 million financing to fund a new city hall,
- Issued on July 1, 2009,
- Equal annual principal payments made over the 10-year term, and
- Semi-annual interest payments made over the 10-year term.
As the example below shows, if tax-exempt interest rates were at 5% and taxable BABs rates were 2.69% more, or 7.69%, the issuer would be virtually indifferent between bond types.
|Traditional Tax Exempt Bond||Build America Bond (Direct Pay)|
|Payment Dates||Principal||Tax-Exempt Interest @ 5%||Total Amount Issuer Owes the Investor (Net Cost of Debt)||Principal||Taxable BABs Interest @ 7.69%||Total Amount Issuer Owes the Investor||Less 35% of Interest Rec'd From US Treasury||Net Cost of Debt|
|1/1/2011||$ -||$ 250,000||$ -||$ -||$ 384,500||$ -||$ 134,575||$ -|
|$ 10,000,000||$ 2,750,000||$ 12,675,000||$ 10,000,000||$ 4,229,500||$ 14,229,500||$ 1,480,325||$ 12,749,175|
The table below shows the sensitivity to movements in rates and spreads.
- An issuer would choose to issue BABs, for example, if tax-exempt rates moved from 5% to 6% and the spread remained 2.69% (or 269 basis points).
- Conversely, the issuer would choose to issue tax-exempt bonds if the spread between the tax-exempt and taxable rate increased.
|Tax-Exempt Rate||Spread Between Tax-Exempt and Taxable Rates||BABs Rate||Net BABs Interest Cost to Issuer|