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Article

Build America Bonds

Andrew Ang, Vineer Bhansali and Yuhang Xing
The Journal of Fixed Income Summer 2010, 20 (1) 67-73; DOI: https://doi.org/10.3905/jfi.2010.20.1.067
Andrew Ang
is Ann F. Kaplan Professor of Business at Columbia Business School in New York, NY.
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  • For correspondence: aa610@columbia.edu
Vineer Bhansali
is managing director at PIMCO in Newport Beach, CA.
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  • For correspondence: vineer.bhansali@pimco.com
Yuhang Xing
is associate professor of finance at Jones School of Management at Rice University in Houston, TX.
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  • For correspondence: yxing@rice.edu
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Abstract

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 bps higher than comparable Treasuries and 88 bps higher than comparable highly rated corporate bonds. For individual investors, BABs represent poor deals compared to 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.

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The Journal of Fixed Income
Vol. 20, Issue 1
Summer 2010
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Build America Bonds
Andrew Ang, Vineer Bhansali, Yuhang Xing
The Journal of Fixed Income Jun 2010, 20 (1) 67-73; DOI: 10.3905/jfi.2010.20.1.067

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Build America Bonds
Andrew Ang, Vineer Bhansali, Yuhang Xing
The Journal of Fixed Income Jun 2010, 20 (1) 67-73; DOI: 10.3905/jfi.2010.20.1.067
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  • Article
    • Abstract
    • BABS AND TAX-EXEMPT MUNICIPAL BONDS
    • COMPARING BABS WITH OTHER BOND MARKETS
    • RESULTS
    • CONCLUSION
    • ENDNOTES
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