Are Standard Muni Bonds Less Popular Than BABs?
More popular than traditional tax exempt muni bonds, Building America Bonds (BABs) were created in an attempt to stimulate the crawling American economy in the 2009 Economic Recovery and Reinvestment Act. BABs are intended to encourage those in low income tax brackets, retirees, and pensioners to gravitate toward tax-exempt bonds. While these municipal bonds are wildly popular, investors are still encouraged to play it safe and look up a given bond online for pricing and yield information.
Types of BABs
Tax Credit BABs
With Tax Credit BABs, the government covers 35% of interest rates for the issuers through subsidy, which equals around 25% of the total return. These BABs can be used to finance specific governmental purposes in which traditional tax exempt-bonds would also be applicable.
Direct Payment BABs
While Direct Payment BABs offer larger subsidy than Tax Credit BABs, they’re considerably more restrictive. As of right now, one must fill out a payment request form for Direct Payment BABs, though it is hopeful that the process will become more streamlined and one can submit the request for this type of bond online.
Governments Issue More BABs
Than GO Muni Bonds
The most important BAB bullet point for many investors is the reduction of bond pricing for investors through federal subsidies. Clearly, investors have found this to be most alluring, as $94 billion BABs have been sold since being introduced to the market last April with yields falling below those of prior tax exempt muni bonds.
Corporate bond investors have been very gung ho about buying up BABs from the outset, seeing them as an attractive opportunity pick up yield. This wild popularity prompted state and local governments to sell more BABs than GO muni bonds, and many began to fear municipalities would eventually cave in and borrow more than they could actually afford.
How to Make the Most of Your BAB Bond Online
Fortunately, BABs have largely proven to be a success, benefiting both issuers and investors, allowing investors to enjoy quality bond returns while issuers can save tens of millions of dollars in financing costs. Even with the popularity and success of BABs, investors still need to keep a cool head with these muni bonds. As always, it’s important to pay attention to prevailing muni rates. It’s important to research a given bond online, as valuable information that promotes smart decision making is truly the greatest asset an investor can have.