17 Pages Posted: 4 Jun 2010
Date Written: May 2010
Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs have lower yields than regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.
Suggested Citation: Suggested Citation
Ang, Andrew and Bhansali, Vineer and Xing, Yuhang, Build America Bonds (May 2010). NBER Working Paper No. w16008. Available at SSRN: https://ssrn.com/abstract=1612603