Private Purpose Bond
Categories: Bonds
Municipal bonds are usually issued by local governments to raise cash for government projects. The roof on the library caved in when the mayor's helicopter tried to land there. Two snowplows crashed into each other and need to be replaced. Every member of the city council needs hair plugs. That kind of thing.
A private purpose bond adds a twist. It's a muni bond...except the funds get used for an organization other than the government itself.
A sports stadium is a common example. Billy McBillionaire owns the Cruisers, a professional cricket team headquartered in Vernon, Idaho. Billy is threatening to move the team to Montana if the good people of Vernon don't build him a new cricket stadium. They agree, issuing bonds to fund the construction. Since more than 10% of the funds will benefit a private entity (i.e. Billy and his Cruisers), they are categorized as private purpose bonds.
These trade in the muni market, but usually don't get the same tax advantages as regular municipal bonds.
Related or Semi-related Video
Finance: What is a Moral Obligation Bond...7 Views
Finance allah shmoop what is a moral obligation bond So
one of our writers totally messed this one up and
we started a video about promises to pay dentists So
a moral obligation bond is one that gets paid because
well you have good morals or you feel morally obligated
to pay hey if you don't necessarily legally have to
pay it but you're morally obligated Teo do so let's
think about this Hospitals universities do gooder projects of all
shapes and sizes that is on a lone dusty highway
west of omaha a tiny city wants to build a
trucker parking hub with excellent hot dogs clean ish showers
and a mud flap emporium They need three million bucks
to build this thing for the kindly loving truckers while
it's still human beings doing nothing and well on their
own city can't afford it the state realizing how good
this depot would be for commerce in business coming into
and out of the state they decide to guarantee the
bonds of that little city The city is backing it
without reams of paper a forest full of paper sign
contracts or any other major structural legal limits in practice
The bonds air publicized as a gift to the area
and they create extreme embarrassment to the politicos who backed
it Should that bond ever fail That is whoever's managing
the facility and supposed to collect the you know shower
tuition from the truckers stops collecting it and or the
truckers find somewhere else to go with mohr cleanest showers
or this is a municipal moral obligation bond but the
term applies to bonds that are not government backed as
well The holy rollers church of greater baltimore is raising
money to replace all the stained glass windows that have
been broken by you know errant baseball's from the neighboring
field They get each of their congregants toe loan the
church three grand and no they're not passing contracts along
with the collection plate there's nothing in writing saying that
the church will use that money to replace the windows
they promised or because the members let the church get
their dough back The church has a moral obligation to
pay back the money that they were loaned to make
good on their promise and if they default well they'll 00:02:10.823 --> [endTime] have to answer to the big guy in charge