Private Activity Bond - PAB

Your hometown has several blocks of emptied-out old factories and burned-out buildings. You want to build a high-end outdoor mall, a shopping experience combined with amenities like a water park and a ferris wheel. You hope it will draw in potential tourists from surrounding areas.

Your local government thinks it’s a great idea. They think it’s a wonderful way to revitalize downtown. You want them to invest some of the town's money in the project, but they don’t have anything to offer. (A town with a bunch of burned-out buildings in its downtown typically doesn't have cash for water slide construction.)

One compromise step you can take involves private activity bonds. These debt securities carry some of the benefits of municipal bonds, such as tax exempt status. However, the money goes to private investors, like you. They are not explicitly backed by a government. You'll still have to pay back all the money, and any default falls on you. The government isn't promising to use tax revenue to service the debt. But, while you have to carry the burden of the debt, you get the market benefits of having the pseudo-government's help.