Municipal bonds, or "munis" for short, are IOUs issued by city, county and state governments in order to raise funds for community projects, such as a highway, new school or hospital. Its main attraction is that the interest paid to the owner of a municipal bond is exempt from federal taxes. In most cases, the investor is exempt from state taxes and he resides in the same state in which the municipal bond is issued.
General Obligation vs. Revenue Bonds
There are two types of local bonds. The first are called General obligation (GO for short), and are backed by the issuer's abitur to tax. General obligation bonds are issued to pay for projects Such schools and sewer systems. Most investors generally Consider Their obligation revenue bonds safer than Counterparts, this is a misconception.
Revenue munis, on the other hand, are issued by special state or local-government sanctioned entities (: such as a utility company). The interest is serviced (ie, paid) by the revenue generated from the business That backs the obligation. In the case of a water company, bond holders are paid out of the cash generated from customers paying Their water bills.
Revenue munis, on the other hand, are issued by special state or local-government sanctioned entities (: such as a utility company). The interest is serviced (ie, paid) by the revenue generated from the business That backs the obligation. In the case of a water company, bond holders are paid out of the cash generated from customers paying Their water bills.
Tax-Free Munis vs. taxable equivalent yield
If you are an average investor interested in bonds, you may have a hard time deciding between fully taxable corporate bonds or tax-free municipals. Using a formula called taxable equivalent yield, should be able to decide what type of fixed income investment, you will get the best performance after taxes. This is the formula you should use:
If you are an average investor interested in bonds, you may have a hard time deciding between fully taxable corporate bonds or tax-free municipals. Using a formula called taxable equivalent yield, should be able to decide what type of fixed income investment, you will get the best performance after taxes. This is the formula you should use:
tax-exempt yield
---- (Divided by) ----
1 - level of taxes
An investor in the tax bracket of 15% interest on a municipal bond that produces 5% would enter the following:
05 (tax-free yield)
------- (Divided by) --------
0.85 (1-0,15 = 0.85)
The answer is 0.0588, or 5.88%. This means that if the investor could find a fully taxable bond with a yield above 5.88%, you would earn more for your money by buying instead of the municipal tax free. Two rules of thumb:
---- (Divided by) ----
1 - level of taxes
An investor in the tax bracket of 15% interest on a municipal bond that produces 5% would enter the following:
05 (tax-free yield)
------- (Divided by) --------
0.85 (1-0,15 = 0.85)
The answer is 0.0588, or 5.88%. This means that if the investor could find a fully taxable bond with a yield above 5.88%, you would earn more for your money by buying instead of the municipal tax free. Two rules of thumb:
- Non-profit organizations are almost always better to invest in corporate bonds, because of their tax-free status.
- Investors in high-income brackets are almost always better to invest in tax-free municipal bonds.
Measuring the safety of municipal bonds
There is very little information available on individual municipal bonds. This forces investors to rely heavily on the credit ratings assigned by various credit agencies. To help ensure the security of your investment, bondholders should know 1.) That is responsible for the administration of the interest payments on the bonds, and 2.) The underlying economics of the issuer. It is a thriving community with a growing base of high net worth deterioration citizen or a metropolis with low-income demographics? All these factors should be of concern. In the 1942 edition of Security Analysis, Benjamin Graham recommended municipal bonds have the following characteristics:
There is very little information available on individual municipal bonds. This forces investors to rely heavily on the credit ratings assigned by various credit agencies. To help ensure the security of your investment, bondholders should know 1.) That is responsible for the administration of the interest payments on the bonds, and 2.) The underlying economics of the issuer. It is a thriving community with a growing base of high net worth deterioration citizen or a metropolis with low-income demographics? All these factors should be of concern. In the 1942 edition of Security Analysis, Benjamin Graham recommended municipal bonds have the following characteristics:
- Population of 10 000 or more.
- diverse economy
- Timely payment history last obligatio
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