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What are Housing Bonds?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 September 2016
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Housing bonds are financial instruments that are issued in order to generate financing for the construction of some type of building that is planned by a municipality. One example of a building that would be funded by a housing bond issue would be a public housing project that would be owned and operated by the local or state government. Housing bonds may be issued under the auspices of a particular department or division within the municipal government, or by the incorporated city as a whole.

As with any type of municipal bond strategy, the housing authority bond normally has a maturity date and will pay a fixed amount of interest. The interest may be paid in increments throughout the life of the bond, or be provided as a lump sum once the bond is fully mature. Housing authority bonds are also callable, which means that the issuer can choose to pay off the bond issue earlier than the original maturity date, paying the bond holder the interest accrued up to that point, and offering the holder the opportunity to participate in a new bond issue.

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It is not unusual for a local city or town to make use of housing bonds in order to improve or expand public housing. The proceeds from the housing bond program may go to renovate existing housing, possibly making structural alterations to the units in the project, or upgrading such systems as the heating and cooling facilities. A bond issue of this type can also be used to manage the costs of constructing new housing that will be used to provide affordable housing alternatives to qualified applicants residing in the city.

Many municipalities combine the issuance of housing bonds with subsidies received from a national government agency. However, that is not always the case. If the municipality does not qualify for federal assistance in the building project, it is possible to proceed by simply creating a workable bond for housing strategy. Assuming the plan meets with the approval of the local government, the city or town then issues the bonds according to terms that are in compliance with current law and regulations, and moves forward with the project without any type of federal aid involved.

Generally, the amount of return on housing bonds is similar to that of any bond issue. While the return is not spectacular, this type of investment carries a relatively low amount of risk, making it a good option for more conservative investors. While the bonds are often configured in a way that allows them to be called before the original maturity date, most bonds of this type will run their entire course, providing the investor with the amount of interest that was projected when the bonds were purchased.

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