Private Purpose Bond

AAA

DEFINITION of 'Private Purpose Bond'

A type of municipal bond that is issued to finance a project for which at least 10% of the benefit will go to a private sector entity.


Municipal bonds are usually associated with tax-free income. However, the Tax Reform Act of 1986 requires municipal bonds to be categorized as either public purpose or private purpose, and makes the interest payments that investors receive from private purpose bonds taxable unless the bonds are specifically exempted.

INVESTOPEDIA EXPLAINS 'Private Purpose Bond'

A bond used to finance a sports stadium would be considered private purpose because much of the income generated by the stadium will go to sports team owners.


Public purpose bond income is tax free at the federal level, and often at the state level if the individual resides in the state where the bond was issued.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Certificateless Municipals

    A type of municipal bond that does not issue a certificate to ...
  3. Citizen Bond

    A type of certificateless municipal bond used to finance local ...
  4. Public Purpose Bond

    This type of bond is used by municipalities to finance public ...
  5. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  6. Overlapping Debt

    The financial obligations of one political jurisdiction that ...
RELATED FAQS
  1. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  2. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  3. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
  4. How stable are municipal bonds?

    Stability is relative in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, ... Read Full Answer >>
  5. What are the differences between debt and equity markets?

    The basic differences between the debt and equity markets include the type of financial interest they represent, the way ... Read Full Answer >>
  6. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>
Related Articles
  1. Investing

    The Advantages Of Bonds

    Bonds contribute an element of stability to almost any portfolio and offer a safe and conservative investment.
  2. Bonds & Fixed Income

    Corporate Bonds: An Introduction To Credit Risk

    Corporate bonds offer higher yields, but it's important to evaluate the extra risk involved before you buy.
  3. Bonds & Fixed Income

    Boost Bond Returns With Laddering

    If you want a diversified portfolio and steady cash flow, check out this fixed-income strategy.
  4. Taxes

    Weighing The Tax Benefits Of Municipal Securities

    Find out how to determine whether the tax exemption offered by "munis" benefits you.
  5. Bonds & Fixed Income

    Asset Allocation In A Bond Portfolio

    An investor's fixed-income portfolio can easily beat the average bond fund. Learn how and why!
  6. Investing Basics

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  7. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  8. Fundamental Analysis

    Present Value Interest Factor of Annuity (PVIFA)

    PVIFA can be used to calculate the present value of a series of annuities by considering cash flows and depreciation.
  9. Investing Basics

    What are Cash Equivalents?

    Cash equivalents are money market instruments.
  10. Economics

    Sacrifices Necessary to Keep Puerto Rico Afloat

    After years of band aids and significant borrowing to meet its obligations, the time has come for meaningful reform in Puerto Rico.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!