The key feature of a private purpose bond is that they are solely used to help finance private investments and amenities. Comparatively, a public purpose bond is exclusively for investments that benefit the public, i.e. public facilities or projects that benefit a sizeable community.

The reason why The Tax Reform of 1986 led to the separation of municipal bonds into two types was for a change in the taxation regulations. The taxation regulations are currently quite clear and state that: Private Purpose Bonds are applicable for taxation unless exempted (which is rare). Public Purpose Bonds are exempt from federal taxation.

Taxable municipal bonds most commonly pay a higher rate of interest than other bonds, however with protection from early redemption and some exemption from state and/or local taxes with which the bonds are issued, it evens itself out. States will usually always use their allotted quantity/value of tax-exempt bonds and therefore issue taxable bonds which are most commonly used to finance private development. Taxable municipal bonds are always issued as private purpose bonds when financing projects such as sports entertainment facilities.

There are two major differences between private bonds and public bonds; first, the facility will be privately owned, and second, private bonds are taxed unless otherwise stated. According to The Tax Reform Act of 1986 where municipal bonds were separated into two types; public purpose bonds and private purpose bonds – Public purpose bonds are exempt from federal taxation. Private purpose bonds however as already stated are taxed.

Private bonds can be used to construct facilities that will be used by the public, and this is one of the main uses of private bonds. Private bonds interest is payable on all investments taken out, the amount of payable interest however depends on the terms of the agreement.