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Investors who are interested in keeping a portion of their investment portfolio allocated into lower risk often choose municipal bonds or private activity bonds.  Investing in private activity bonds or other revenue bonds issued by a governing agency typically arrive with a better than average rating, offering a safe investment for diversification.

What Are Private Activity Bonds?

Private activity bonds are issued by a governing agency, such as cities or states, for the purpose of helping raise money for a private company.  Generally, municipal bonds are issued for public works such as streets and sewers.  But other private entities that provide a service to the general public may be eligible to receive special private activity bond funds.  Groups such as zoos, hospitals, and professional baseball stadiums are examples of private activity bonds.

Considerations of Investing in Private Activity Bonds

Though private activity bonds are issued by governing agencies, they do not always carry the same tax advantages.  Regular general obligation municipal bonds offer tax exemption status for interest earned.  This can be an attractive advantage to high tax bracket investors.  However, since private activity bonds are allocated to the benefit of non-essential works and other private companies, they are subject to the alternative minimum tax on all interest earned.

Investment Strategies for Private Activity Bonds

1. Tax Considerations – If you are an investor who also wishes for the tax advantages of a tax free municipal bond, look for a private activity bond that offers tax exempt status.  Some private companies that are non-profit and provide a higher importance public service will be eligible for tax exemption with their private activity bond.  Investors within a higher tax bracket can benefit most from tax exemption.  However, investors in lower tax brackets may benefit more by buying private activity bonds with an alternative minimum tax obligation.
2. Higher Yield – Private activity bonds generally do not carry the financial backing of the issuing government.  However, that doesn’t mean that private activity bonds are generally rated lower by the main rating agencies.  You can still find private activity bonds with a reasonable yield rated at A or higher.
3. Where to Buy – Investing in private activity bonds is easy for the investor who knows where to look.  Private activity bonds are issued directly from governing entities just the same as regular municipal bonds.  Check with websites like the US Department of Treasury for information about newly released private activity bonds.  You can also purchase private activity bonds through most any major brokerage house.
4. Research the Project – Private activity bonds are for the benefit of a private corporation, not a government funded agency.  Just as you research companies for stock investing, be sure to know the extensive financial history of the company benefiting from the bond and whether their financial projections will help them complete the public project assigned to them.

The issuance of private activity bonds dropped a dramatic 52% from 2007 to 2008.  It is obvious that economic indicators are a big influence on how and to whom private activity bonds are issued.  If you are interested in allocating a portion of your portfolio to private activity bonds, be sure to perform extensive research in order to assure that your money will be in a safe place.

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