Muni Bonds Vs BAB Bonds
July 25th, 2010 | Finance |Municipal bonds, also known as muni bonds, are a type of bond that are issued by a government agency, city, county, school districts, or any other group of governments that are below the state level. Often the interest received by the bond holders is exempt from federal and state taxes. This makes municipal bonds an appealing choice for smaller investors. However, if a municipal bond is issued for a certain purpose, they may not be tax exempt. Some of the projects funded by municipal bonds include hospitals, power plants, or airports.
Municipal bonds can be sold to other investors if need be, which make them a pretty safe type of bond. There are two types of municipal bonds. The first type of municipal bond is a General Obligation bond (GO bond). The GO bonds are unsecured bonds, and mature in ten or more years. They finance city projects that do not produce revenue. The bond issuer repays the bonds with fees raised by fees or property sales. Taxation can be used to ensure guaranteed payment.
The second type of municipal bond is a revenue bond. These are projects, that once funded, pay back money to the issuer. An example of this would be a toll way that is built, or a stadium that can earn enough revenue once it is built. These revenue bonds have a higher risk than the GO bonds, because there is a chance that the designated project may not bring in enough money to pay the bondholders. However, these muni bonds yield more.
In comparison, the Build America Bonds program (BAB) allows state and local governments to provide taxable bonds in 2009 and 2010 for government capital projects while receiving a federal subsidy payment for a part of their borrowing costs. Unlike municipal bonds, BABs issuers can choose whether they want a tax credit for the buyer or a direct payment from the federal government equal to 35% of the interest costs. Also, while municipal bonds attract smaller investors, the BAB program may draw more foreign investors. In looking at muni bonds vs BAB bonds, it also appears that BAB bonds are generally issued for debt twenty years and longer, while the muni bonds are ten years or longer.