Build America Bonds - BABs
During the Great Recession of 2008, the government tried to do whatever it could to get the economy back on track. Unemployment was in the double digits, and millions of homes were being foreclosed. It was difficult for anyone to borrow money from traditional banks.
The U.S. Congress passed the American Recovery and Reinvestment Act in 2009. Included in this were Build America Bonds (BABs). There are two types of BABs which are taxable municipal bonds: those that carry special tax credits, and those that receive federal subsidies.
For the tax credits, the credit went to the issuer, so it was less expensive for state and local governments to borrow money. Investors in pension plans, as well as those looking for high rates of interest, were attracted to the BABs.
States such as California made great use of the federal subsidies. They sold $5.2 billion in BABs at an interest rate of 7.4%. With the federal subsidy they were reimbursed 2.6%, so they only had to pay out 4.8%.
These bond offerings here and in other states were so popular they were often oversubscribed.
The program ended on December 31, 2010...once the economy was considered to be in recovery.
Related or Semi-related Video
Finance: What are Government Bonds?52 Views
finance a la shmoop. what are government bonds?
now we're gonna narrow this question a bit and declare these bonds to be US [hands shape the question]
government bonds. our answer would be a tad different if we were discussing
bonds backed by North Korea Nigeria or Egypt so US government bonds come in a
few flavours. generally speaking they range in duration that is how long it
takes for them to mature and the principal get paid off. short-term US
government paper it's a fancy term for a bond ,refers to things that come due in a
year or less. that's short-term. year or less. and then there are Treasury bills
which come in a variety of durations and our price like this note how different
these look versus just you know buying a bond .but when you buy a bond it has a [chart shows prices]
face amount of say a thousand bucks for what is called its par value. that piece
of paper might agree that clown shoes incorporated which is where most
congressmen get their Footwear of course, will pay 30 bucks twice a year to the
holder for 10 years, and then pay back the original thousand bucks invested
it's like a normal vanilla bond, the interest rate here in this case is 6%
per year, but many US government notes are sold at auction which means they
sell at a discount to their par value. well regardless of how they're sold US [auction with a clown in attendance]
government bonds are backed by what is generally perceived in the world as the
most certain or secure financial backing. even more powerful than Google .if sorry
Larry and Sergey we're just keeping it real. the bonds are backed specifically
by the US government's right to tax its citizens. and oh they tax us. do they ever.
so now you can stop wondering about that bottomless hole a third or more of every
paycheck vanishes into. [portion of paycheck flies down dark hole in the ground]
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