|
|
|
|
Who We Are
Money Focus Mutual Funds Insurance Mortgages Taxes Contact the Editor
Featured Site AfterHourTrades.com, Inc. Featured Columnist: |
Municipal Bonds
It is important to understand that bonds are simply a means to borrow money. You are essentially the lender. The deal itself involves the repayment of this debt through interest on the loan. This would be called the return. The yield that is often spoken about in such transactions, can be simplified to a number value placed on the riskiness of the borrower. In other words, will you get your money back, or not.
Municipal bonds are used for state and local government projects that could range from anything such as parks or schools, airports, sewers, and whatever falls in the public domain, to raising money for upkeep on these public works. And they come in as many flavors as there are reasons for these governments to borrow.
General Obligation bonds are baked by the good faith and credit of the borrower. You can pretty much count on a government entity's ability to repay you. This repayment can come from the taxpayers themselves, or from any other means at the disposal of the government.
Limited or Special Tax bonds may be issued to raise money for the government to pay for specific provisions. Revenue bonds as well as Industrial Revenue bonds are repaid using fees or tolls that are generated for the project itself. It is all about repayment.
Governments can and do go bankrupt and the ability to repay you can be seriously jeopardized. There is always a risk. Be careful that this risk doesn't cannibalize your return. Some government municipalities will purchase insurance against the likelihood of default. But it will only effect your return. Stick with high quality issuers (borrowers).
The attractiveness in these types of bonds, often referred to as "munis" is their tax free status. This little perk allows for all interest earned to fly under the radar, so to speak, of the IRS. Double Munis are an investment in your home state, and can be doubly exempt, and if the muni is issued by your city, you avoid paying tax in all three cases.
If you heart is set on bonds, remember the lower yield delivered by municipal bonds is not something you have to accept. In most cases, a similar corporate issued bond will return better than a muni.
Order your copy of Building Wealth in a Paycheck-to-Paycheck World by Paul Petillo. It is packed with safe, proven wealth-building strategies that cover all the major components of a balanced financial plan, including:
|
