DEFINITION of 'Bond Bank'

A state-level entity that provides that state's smaller public entities with debt financing at a lower cost than what the small entity could obtain on its own. Bond banks serve cities, municipalities, schools, hospitals, water and sewer districts, and more. They are able to provide lower-cost financing as long as they have higher credit ratings than the entities that seek to borrow.

BREAKING DOWN 'Bond Bank'

Not all U.S. states have bond banks. States that do include, but are not limited to: Maine, Indiana, Idaho, New Hampshire, New York and Alaska. Vermont was the first state to establish a bond bank. In some cases, bond banks make it possible for an entity that otherwise could not obtain financing to get it. For example, investors might be reluctant to invest in the municipal securities of a small town with limited resources, but eager to invest in munis issued by a larger entity with significant resources like a bond bank. Bond banks can also pool together a number of small offerings to provide investors with a more attractive diversified product.

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