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Private Activity Bonds – What They are and How They Work

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 quite different to regular fixed-rate investment bonds. They are essentially corporate bonds which have gotten the benefit of the lower interest rates paid on tax free municipal bonds.

Are they a good investment? Before you buy bonds, you should analyse the risks and rewards associated with the product you are interested in.

It must be noted that 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
  • Airports
  • Docks
  • Parking Garages
  • Water and Sewage Plants
For the definition and explanation of more bond related words visit the Learn Bonds glossary where we give the meaning of many additional terms.

Learn More:

All bout Municipal Bonds
The Professional Edge in Municipal Bond Trading
5 Tips For Municipal Bond Investors from BlackRock’s Peter Hayes
Municipal Bond Defaults, Safety, and Credit Ratings

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David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.