Types of bonds. Flashcards
What is a private activity bond?
A bond that is part of a state or local government bond issue where more than 10% of the proceeds are used for a private business purpose.
What percentage of proceeds from a private activity bond must be used for private business purposes?
More than 10%
What types of payments secure more than 10% of the principal and interest in a private activity bond?
Payments for property or borrowed money.
Name an example of a private activity bond.
- Exempt facility bonds
- Qualified mortgage bonds
- Qualified veterans’ mortgage bonds
True or False: Private activity bonds can be used solely for public purposes.
False
Fill in the blank: More than 10% of the payment of the principal and interest of a private activity bond is secured by an interest in _______.
[the property]
What is the primary purpose of issuing private activity bonds?
To finance private business purposes.
What are qualified private activity bonds?
Qualified private activity bonds are tax-exempt bonds issued by a local or state government, the proceeds of which are used for a defined qualified purpose by an entity other than the government issuing the bonds.
What is required for a bond to be tax-exempt?
For a bond to be tax exempt, 95% or more of the net bond proceeds must be used for one of several qualified purposes as described in the Internal Revenue Code.
What are nonexempt private activity bonds?
Certain types of state or local government bonds are considered nonexempt private activity bonds, and interest received on those bonds is not exempt from federal income tax.
How does the interest rate on tax-exempt bonds compare to taxable bonds?
The stated interest rate on tax-exempt bonds is typically lower than the rate on taxable bonds.
What is the after-tax return for high-income individuals on tax-exempt bonds?
For individuals in high-income tax brackets, their after-tax return may be greater than that received from a fully taxable corporate bond after the applicable taxes are taken into account.
