Pros and Cons to a Build America Bond

The Build America Bond is a type of government bond that is designed to generate funds for large construction projects. This type of bond has been very popular in offers several advantages to investors. At the same time, there are a few drawbacks that you should know about. Here are a few of the pros and cons of the Build America Bond.

Pros

One of the biggest advantages of this type of bond is that it is secure. Investors who are looking for a steady source of income that is not going to be negatively affected can invest in this type of bond for the long-term. The issuers of these bonds are local and state governments which are looked at as being very safe. Investors believe that this type of bond is going to be a lot safer than investing in a company that could go out of business in the near future. In order to continue receiving interest payments, the entity that is making the payments has to stay in business. Therefore, this type of investment is very attractive to investors.

Another big advantage of the Build America Bond is that it pays good interest rates. The interest rates that are paid by these government bonds are comparable to what you could get from a corporate bond. In the past, government bonds and municipal bonds did not pay anywhere near the rates that you could get from the corporate world. However, with these bonds, the rates are going to be much higher than normal.

The reasoning behind the increased rates is the subsidies that are being provided by the federal government. The municipalities can pay rates that they are used to paying. Then, the federal government kicks in another 35 percent to make the bonds really attractive to investors. This allows you to get an interest rate that is like a corporate bond with the safety of investing in the government.

Cons

Even though this type of bond is attractive, there are a few potential drawbacks associated with it. For one thing, you are going to have to pay taxes on the amount of interest that you bring in. This is a change from traditional municipal bonds in which the interest was tax-free. Therefore, the amount of interest that you earn is going to be counted as regular income and you will have to pay taxes on it at your regular marginal tax rate.

Another disadvantage of this type of bond is that they are difficult to come by for individual investors. These bonds were so popular that institutional investors snatched them up in large quantities. If you are an individual, the easiest way to get your hands on one is in the secondary market. In order to purchase this type of bond in the secondary market, you are going to have to pay a premium to the face value of the bond.

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