Build America Bonds (BABs)

Build America Bonds (BABs) are taxable municipal bonds that are issued by state and local governments to finance infrastructure projects. They are backed by the full faith and credit of the issuing government, and their interest payments are exempt from federal income tax. BABs are often used to finance public works projects such as roads, bridges, and schools.

BABs were created in 2009 as part of the American Recovery and Reinvestment Act (ARRA). The goal of BABs was to stimulate the economy by providing state and local governments with a low-cost source of financing for infrastructure projects. BABs were very popular during the early years of the program, but their popularity has waned in recent years as interest rates have risen.

BABs are issued in a variety of maturities, from one year to 30 years. The interest rate on a BAB is determined by a competitive auction process. BABs are typically rated AAA by the major credit rating agencies.

BABs can be purchased by individual investors, as well as by institutional investors such as banks and pension funds. BABs are typically sold through a broker-dealer.

BABs offer a number of advantages over other types of municipal bonds. First, BABs are exempt from federal income tax. This can be a significant advantage for investors who are in high tax brackets. Second, BABs are backed by the full faith and credit of the issuing government. This means that investors are unlikely to lose money if the issuing government defaults on its debt. Third, BABs are typically rated AAA by the major credit rating agencies. This means that they are considered to be very safe investments.

However, BABs also have some disadvantages. First, BABs are taxable at the state and local level. This can be a significant disadvantage for investors who live in states with high income taxes. Second, BABs typically have lower yields than other types of municipal bonds. This is because BABs are backed by the full faith and credit of the issuing government, which makes them less risky than other types of municipal bonds.

Overall, BABs can be a good investment for investors who are looking for a safe, tax-exempt investment. However, investors should carefully consider the advantages and disadvantages of BABs before investing.