Series 50: Bank Qualified (BQ) Bonds

Bank Qualified (BQ) Bonds

When a bank buys a bond, it generally buys it with borrowed money, money borrowed at an interest rate such as LIBOR. Its carrying cost is the annual interest it pays to its lender for the borrowed money. For example, if a bank borrows $20 million from another bank at the one-year LIBOR rate of 0.5%, its carrying cost will be roughly $100,000.

The Tax Reform Act of 1986 generally prohibits banks from deducting the carrying cost associated with the ownership of tax-exempt municipal bonds. However, the law makes an exception for small issues of public purpose bon