Build America Bonds: Risk Considerations

Liquidity Risk - As a new kind of bond offering, the market of buyers and sellers for Build America Bonds is also new. There is a risk that not enough interested buyers will be available to permit an investor to sell at or near the current market price.

Interest Rate Risk - The risk that interest rates might change affects Build America Bonds. For example, if interest rates rise, Build America Bond market prices might fall.

Call Risk - Some (mostly larger) Build America Bond issues have conformed to the convention in the corporate bond market of either requiring what is called a make-whole call premium or not having an option of being redeemable. Some have been issued with provisions that allow state and local governments to "call" the bonds back and refinance if the federal government stops paying subsidy on the interest. Investors should understand what call provisions exist on the Build America Bond issue they are considering. Note that there is only call risk for the investor if the Build America Bond being considered has a call provision.

Credit Risk - This is the risk that an issuer will default or be unable to make payments. The credit of the bond is backed by the municipality issuing the bond, not the federal government. The issuer of the bond must remain solvent in order to pay investors.

Federal Subsidy Risk - There is the risk that the federal government would eliminate or reduce the subsidies for Build America Bonds in the future. Some Build America Bonds have been issued with provisions that allow state and local governments to "call" the bonds back and refinance them if the federal government stops paying subsidy on the interest.