private activity bond

private activity bond

A type of municipal bond issued when funds are to be used for a nonessential purpose. Private activity bonds pay taxable interest unless specifically exempted by the federal government. Private activities for which tax-exempt bonds may be issued include airports, electric and gas distribution systems, government mass transportation systems, hazardous waste disposal facilities, solid waste disposal facilities, and student loans. Small issues of industrial development revenue bonds and nonprofit college and hospital bonds are also permitted. Except for nonprofit college and hospital bonds, interest from tax-exempt private activity bonds is subject to the alternative minimum tax. Also called nonessential function bond, private purpose municipal bond. Compare essential function bond. See also 501(c)(3) bond, municipal bond, small-issue bond.

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private activity bond

A municipal bond that is issued in order to attract private investment. For example, a city may issue a private activity bond to build a new airport, which will, in turn, attract airline companies to set up shop in that city. The federal government has strict regulations about what type of activities may qualify for a private activity bond: the issue must provide some benefit for the public at large in addition to attracting private investment.