What Is a Development Bond?

Malcolm Tatum

A development bond is a type of bond issue that is created and offered to investors by a local, state or national government or a related development agency. The general idea for this type of bond has to do with providing funds that aid in developing industries within a given geographical area, a measure that can help to improve the standard of living in that area by lowering unemployment and providing additional income to the government in the form of taxes. Like most bond issues, a development bond is considered a relatively safe investment that provides a small but steady return.

Man climbing a rope
Man climbing a rope

In general, a development bond will focus on a specific project that is likely to benefit the community in the long run. One example is the use of this type of bond issue to help encourage industries to build and operate facilities within the area. By providing development funds, the government is helping to create industry within the area that ultimately leads to the creation of more jobs and more income circulating in the local economy. At the same time, the bond is providing resources for development that will eventually result in businesses that generate revenue and pay taxes. Under the best of circumstances, the industrial development project is successful and all these goals are met.

For investors, the return offered on a development bond is often similar to that of any other type of municipal bond issue. Since there is not a great deal of volatility with the bond issue, the returns are often less spectacular than investing in stocks or participating in the foreign exchange markets. The real benefit is that while the returns are lower, the chances for any type of failure that would result in a loss are extremely low, with the investor standing to make something from the venture even if the bond is called early by the issuer.

As with most types of bonds, the way that interest is paid on the development bond will vary. Some bonds will pay a lump sum of interest at the time the issue matures, while others will provide interest payments at scheduled intervals throughout the life of the bond. Many of these bonds will also provide the issuer with the ability to call the bond early if certain events should take place. By understanding the terms and provisions associated with the development bond, the investor can project the returns, including what type of return would be realized if the bond was called early.

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