What are the two main criteria to qualify as private activity bonds?

Prepare for the CPFO Debt Management Exam. Study effectively with flashcards and multiple choice questions, complete with hints and detailed explanations. Get exam-ready!

Private activity bonds are a specific category of tax-exempt bonds that, while issued by governmental entities, are primarily used to finance projects that benefit private individuals or entities. The defining criteria for these bonds mostly center around the levels of private use and private security.

The correct answer emphasizes two critical thresholds that categorize a bond as a private activity bond: the limitation on private loans, specifically a threshold of 5% or $5 million, and the limitation regarding private business use or securing 10% or $15 million. These thresholds are crucial because they ensure that the majority of the bond proceeds are used for public benefit while allowing a certain percentage for private use. If a project exceeds these limitations, it risks losing its tax-exempt status under federal law, impacting the financial incentives for investors.

Understanding these criteria is essential for compliance and for effectively managing debt associated with public finance, as it clarifies when bonds might be subject to different tax treatments and regulations based on their private usage.

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