Private Purpose Bond

A type of municipal bond that is used to finance private rather than public facilities and projects. For example, the construction of a new airport could be financed through a private purpose bond.

Investopedia Says:
The Tax Reform Act of 1986 separated munipal bonds into two types: public purpose bonds, and private issue bonds. Public purpose bonds are exempt from federal taxation. On the other hand, private purpose bonds are subject to tax unless they are specifcially exempted.

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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. See also Taxable Municipal Bond.