Bonds Investing Resources

Every stock investor has to be aware of tax-free bonds. Bonds are much safer and secure in times of crisis. They provide additional income.

Tax-free bonds are issued by government or company to cover money the bondholder has lent. If an individual has invested in a particular company then he partly owns the company. He will receive the credits, since he is a bondholder. Bonds play a significant role in maintaining a balance in the investment.

Tax-free bonds yield very low returns as compared to stocks. But they are very safe and stabile especially when there are fluctuations in the stock markets. A cautious investor should invest in stocks as well as bonds. Stocks are always subject to market risks; where as bonds are cent percent safe.

The bonds are of three types- governmental bonds, municipal bonds and corporate bonds. The maturity period may vary from 6 months to 40 years. All these bonds are tax-free and the bondholder will get the full face value along with the total interest earned at maturity.

Each tax-free bond has a face value which determines the total amount earned by the bondholder at maturity. E.g 10$ face value bond will be worth 10$ on maturity. Coupon is the interest paid by the bonds, which in turn is earned by the bondholders. Maturity is the time period or duration of the bond after which the face value is returned to the bondholder.

The other terminology associated with tax-free bonds is the yield. There are three different types of yields.
Nominal yield- This is the interest rate Current yield- This deals with the present market price of the bond, which may differ from the face value.

Maturity yield-This is a bit complex. This takes into account the present market rate, the maturity period and assumes that the interest payments are reinvested at the bond’s coupon rate. This involves very tedious calculations which can be best done in a computer.

On the whole stock markets perform better in the long run, but bonds provide steady and secured income along with tax benefits.

Municipal bonds are the bonds issued by the state, county or the city to raise some money for development of the area. They are also called Munis. If you are a very cautious investor and do not want to take any risk, then investing in municipal bonds is a good thing for you.

In simple words you will be lending your money to the government agencies to carry out developmental work or maintenance work. Since a municipality or a state going bankrupt is a very rare thing, the investor is sure to get the principal and the interest back at the maturity of the bond.

Another significant thing about these bonds is they are tax free bonds. No federal or state tax is levied on the income generated by the munis. Though before investing into municipal bonds you should talk to the broker and find out more details about it. The reason is not all munis are tax free. Some of the municipal bonds are taxable.
There are two types of bonds. One is called general obligation bonds and the other is revenue bonds.

General obligation bonds are issued to finance projects such as building a school or a sewer system. The revenue bonds are issued by utility companies that are authorized by the state or local government. For example a water company or electricity supplying company can issue revenue bonds. The interest is paid when the customers pay their bills for the service provided. Most people think that general obligation bonds are safer than revenue bonds.

Even though the tax-free aspect of the municipal bonds is very attractive feature, before putting in your hard earned money into the bonds you should consider few things. The first one is to take into account who will be paying interests on the bonds and who is issuing the bonds. If the bond is issued by a state which has lower income population and it is a deteriorating metropolitan area then theses aspects will influence on the repayment of your bonds. On the other hand if it is a growing neighborhood and high income group is settling in that area the chance of getting the full money back are more. You should also consider the history of the said issuer of repaying the bonds.

The minimum amount you have to invest in municipal bonds is 5000$ to gain good returns. The more you put in, the more you will gain. Try and understand the economics and try and understand the tax structure of the bonds before investing. Though it is not totally risk free, investing in municipal bonds is rather a safe option.

When you have some extra money and you want to invest wisely so that it grows, you will surely look into several options. There are many options for investing your money. Buying bonds is one of the ways to make sure that the money is relatively safe.

Before buying bonds you should understand the concept. A bond is a, ‘I Owe You’ note from the issuer. You give your money to the issuer as loan. In return, the issuer promises you to return the money with interest. Generally there are two types of bonds. One is the short term and the other is the long term bond. Short term bonds could be less than a year and the long term bonds could be for more than 10 years.

Buying bond depends upon the investor’s need for money, his capability of taking a risk and his future needs. If the buyer is young, he can take some risk while investing but if he is nearing retirement, then he will need to safe guard his money. Bonds provide a regular income in the form of interest. Therefore, it is a very attractive option for retired people.
Before buying bonds, the buyer should know that there are different types of bonds available in the market.

There are municipal bonds, corporate bonds, saving bonds and government bonds. Some of the bonds are tax-free, that means the income you get out of the bond is not taxed. You do not have to pay the federal or the local state tax on the gains. Some of the bonds such as corporate bonds promise high rate of interest but the issuer going bankrupt is a possibility which can not be ignored. The government bonds and the municipal bonds are relatively risk free as the chances of the government going bankrupt are very less.

Another thing to look into before buying a bond is if the bond has recall option. In simple words if the issuer does not need money any longer he can redeem the bond before its maturity. This may result in lesser interest earning. In short, buying bond depends on various factors. The long term bonds are very beneficial to people who are in the high income tax group because in the long run they can earn more tax free.

Buying bonds is a good strategy to balance your investment portfolio. The risk you might take in stock market can be counter balanced by bonds. It is relatively safe and a conservative approach to saving.