Saturday, October 13, 2018

Online Trading: Different Types of Bonds

Investing in bonds is very safe, and the returns are usually very good. There are four basic types of bonds available and they are sold through the Government, through corporations, state and local governments, and foreign governments.

The greatest thing about bonds is that you will get your initial investment back. This makes bonds the perfect investment vehicle for those who are new to investing, or for those who have a low risk tolerance.

The United States Government sells Treasury Bonds through the Treasury Department. You can purchase Treasury Bonds with maturity dates ranging from three months to thirty years.

Treasury bonds include Treasury Notes (T-Notes), Treasury Bills (T-Bills), and Treasury Bonds. All Treasury bonds are backed by the United States Government, and tax is only charged on the interest that the bonds earn.

Corporate bonds are sold through public securities markets. A corporate bond is essentially a company selling its debt. Corporate bonds usually have high interest rates, but they are a bit risky. If the company goes belly-up, the bond is worthless.

State and local Governments also sell bonds. Unlike bonds issued by the federal government, these bonds usually have higher interest rates. This is because State and Local Governments can indeed go bankrupt – unlike the federal government.

State and Local Government bonds are free from income taxes – even on the interest. State and local taxes may also be waived. Tax-free Municipal Bonds are common State and Local Government Bonds.

Purchasing foreign bonds is actually very difficult, and is often done as part of a mutual fund. It is often very risky to invest in foreign countries. The safest type of bond to buy is one that is issued by the US Government.

The interest may be a bit lower, but again, there is little or no risk involved. For best results, when a bond reaches maturity, reinvest it into another bond.


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Saturday, September 29, 2018

Investment in Municipal Bonds

Municipal bonds are the informal debt instruments issued by county, state and city governments, to raise money for the community projects such as hospital, new school or a highway. The main feature of municipal bonds as a form of investment is that, the interest paid to the municipal bond owner is federal tax exempted. In addition, investors are exempted from state taxes in case they reside in the same state of issuance of municipal bonds.

Usually, there are two forms of investment in municipal bonds. The first is termed as general obligation. This depends on the issuer's ability to tax and issued for payment of projects such as sewer systems and schools. Majority of investors feel that general obligation bonds are much safer as compared to their counterparts in the revenue section. However, this is a misconception.

On the other hand, the local government sanctioned entities or special state government entities issue the revenue municipal bonds.

With the revenue generated from business backing the obligation, investors stand to gain from the interest. In case of water firms, bondholders get cash payment from the amount generated by the customers who pay their water bills.

Taxable Municipal Bonds V/s Tax – Free Municipal Bonds:

Investors having an average interest in bonds may have a difficult time in deciding between tax-free municipal bonds and taxable corporate bonds. With the help of a formula known as taxable yield, investors can decide on the type of fixed income investment that may provide them with greatest after-tax return.

Below mentioned are the two major thumb rules beneficial for amateur municipal bond investors:-

  • Non-profitable organizations are always at an advantage in investing in the corporate bonds largely because of their tax-free status. 
  •  Investors, who come under the high income tax brackets, are always better in investing in tax-free municipal bonds. 

Safety of Municipal Bonds:

In relation to the individual municipal bonds, very little information is available. This forces the investors to depend heavily on credit ratings that credit agencies assign.

In order to ensure the safety of their investments, bondholders need to find out the following:-

  • The responsible authorities for servicing of interest payments on bonds. 
  • Check for the financial status of the issuer. 
Investors need to ask themselves, as to whether the place where they are investing is a promising community with a high net worth having growing citizen base, or a degenerating metropolis having low-income demographics.

In the security analysis of 1942, Benjamin Graham mentioned the below listed characteristics of municipal bonds:-

  • Has a population of at least 10,000 or greater. 
  • Diverse economy and, 
  • It bears a good record of punctual payments on the previous obligations. 
As compared to the high-risk private bonds, investment in government bonds is the best risk free option. There is no wonder that conservative people still opt for municipal bonds as a risk free form of investment.

Investment in municipal bonds yields double benefit to the investor. The first one is that, the investor gets to invest in public development projects and the second benefit is that, it comes with a small smart gain for the investor.


John Elton owns and operates a Best Penny Stocks Picks website to help other investors with their stock decisions. He also operates a Home Based Business earn money online site to help entrepreneurs gain experience and wealth.