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?

No

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)

Assumptions:

  • 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 PrincipalTax-Exempt Interest @ 5%Total Amount Issuer Owes the Investor (Net Cost of Debt) PrincipalTaxable BABs Interest @ 7.69%Total Amount Issuer Owes the InvestorLess 35% of Interest Rec'd From US TreasuryNet Cost of Debt
1/1/2011 $ -$ 250,000$ - $ -$ 384,500$ -$ 134,575$ -
7/1/2011 1,000,000250,0001,500,000 1,000,000384,5001,769,000134,5751,499,850
1/1/2012 -225,000- -346,050-121,118 
7/1/2012 1,000,000225,0001,450,000 1,000,000346,0501,692,100121,1181,449,865
1/1/2013 -200,000- -307,600-107,660 
7/1/2013 1,000,000200,0001,400,000 1,000,000307,6001,615,200107,6601,399,880
1/1/2014 -175,000- -269,150-94,203 
7/1/2014 1,000,000175,0001,300,000 1,000,000269,1501,538,30094,2031,349,895
1/1/2015 -150,000- -230,700-80,745 
7/1/2015 1,000,000150,0001,275,000 1,000,000230,7001,461,40080,7451,299,910
1/1/2016 -125,000- -192,250-67,288 
7/1/2016 1,000,000125,0001,225,000 1,000,000192,2501,384,50067,2881,249,925
1/1/2017 -100,000- -153,800-53,830 
7/1/2017 1,000,000100,0001,200,000 1,000,000153,8001,307,60053,8301,199,940
1/1/2018 -75,000- -115,350-40,373 
7/1/2018 1,000,00075,0001,150,000 1,000,000115,3501,230,70040,3731,149,955
1/1/2019 -50,000- -76,900-26,915 
7/1/2019 1,000,00050,0001,125,000 1,000,00076,9001,153,80026,9151,099,970
1/1/2020 -25,000- -38,450-13,458 
7/1/2020 1,000,00025,0001,050,000 1,000,00038,4501,076,90013,4581,049,985
           
  $ 10,000,000$ 2,750,000$ 12,675,000 $ 10,000,000$ 4,229,500$ 14,229,500$ 1,480,325$ 12,749,175

Rate Sensitivity

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 RateSpread Between Tax-Exempt and Taxable RatesBABs RateNet BABs Interest Cost to Issuer
    
5.00%1.69%6.69%4.35%
5.00%2.69%7.69%5.00%
5.00%3.69%8.69%5.65%
    
4.00%2.69%6.69%4.35%
5.00%2.69%7.69%5.00%
6.00%2.69%8.69%5.65%