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.
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