Also referred to as Industrial Development Bonds, or Industrial Revenue Bonds, private activity bonds are a type of revenue bond that allows bonds to be issued by a municipality in order to fund a private corporation’s project. They are essentially corporate bonds which have gotten the benefit of the lower interest rates paid on tax free municipal bonds.
Private activity bonds are good in the sense that, like with any municipal bond, the interest received on the bond is tax free (they are however subject to AMT). However, they should also come with a large disclaimer as these bonds carry all the same risks as a corporate bond. Normally this means they also carry much more credit risk than a typical municipal bond.
These bonds are basically allowed to be issued as municipal bonds because the private corporations project can be shown to serve a public need or enhance the economy of the municipality. Examples of the types of projects funded with private activity bonds:
- Manufacturing plants
- Parking Garages
- Water and Sewage Plants