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Government subsidizes BAB interest payments
Q
Since the federal government is guaranteeing some of the interest on Build America Bonds (BABs), is it also guaranteeing the principal?
A
James A. Klotz responds:
The federal government is providing an interest subsidy for eligible bond issues of state and local governments. This subsidy offsets the higher interest paid by the issuer.
There really isn’t a federal “guaranty” for BAB interest payments. The federal government writes a check to the municipal entity that is making the interest payment on the BABs.
The federal government is not guaranteeing that the issuer will make its payments, or make them on a timely basis. The principal of these bonds is also not guaranteed, nor subsidized by federal payments.
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