What are Build America Bonds (BAB)

Build America Bonds are part of the federal stimulus plan and provide a 35% rebate on interest costs to issuers or a tax credit to investors, at the issuer’s discretion. What this means is, because of the 35% federal government return, it turns into a lower borrowing rate despite of the fact that it draws a higher taxable financing cost to the issuer.

While a BAB could draw a higher taxable financing cost to the issuer than a tax-exempt bond, the 35% federal government giveback turns it into a lower borrowing rate.

When issued in large amounts and structured differently than the typical municipal bond, these securities could attract nontraditional muni investors, such as pension funds and foreign governments. BAB bonds are giving investors the opportunity to diversify risk into an asset class which historically is very stable.

Bonds to fund municipal projects normally are sold in the tax-exempt arena. With the advent of the Build America Bonds, or BABs, the $2.7 trillion market for tax-free debt is expected to see less volume in the months ahead. That has boosted this market also, with prices of the highly rated, long-term muni bonds advancing almost 0.3 percentage point.

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