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.
BREAKING DOWN '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.