category of municipal bond as defined in the tax reform act of 1986, which is exempt from federal income taxes as long as it provides no more than 10% benefit to private parties and no more than 5% of the proceeds or $5 million are used for loans to private parties; also called public activity, traditional government purpose, and essential purpose bond. Public purpose bonds include purposes such as roads, libraries, and government buildings.

taxable debt obligation of a state or local government entity, an outgrowth of the tax reform act of 1976 (which restricted the issuance of traditional tax-exempt securities. Taxable municipal bonds are issued as private purpose bond to finance such prohibited projects as a sports stadium; as municipal revenue bonds where caps apply; or as public purpose bonds where the 10% private use limitation has been exceeded.

category of municipal bond distinguished from public purpose bond in the tax reform act of 1986 because 10% or more of the bond's benefit goes to private activities or 5% of the proceeds (or $5 million if less) are used for loans to parties other than governmental units. Private purpose obligations, which are also called private activity bonds or nonessential function bonds, are taxable unless their use is specifically exempted. Even tax-exempt permitted private activity bonds, if issued after August 7, 1986, are tax preference items, except those issued for 501(c)(3) organizations (hospitals, colleges, universities). Private purpose bonds specifically prohibited from tax-exemption effective August 15, 1986, include those for sports, trade, and convention facilities and large-issue (over $1 million) Industrial Development Bonds. Permitted issues, except those for 501(c)(3) organizations, airports, docks, wharves, and government-owned solid-waste disposal facilities, are subject to volume caps.