Tax-Exempt municipal bonds are among the most popular types of investments available today with good reason. They offer a wide range of benefits, including:
- Attractive current income free from federal, and, in some cases, state and local taxes;
- High degree of safety with regard to the payment of interest and repayment of principal;
- Dependable income;
- Wide range of choices to fit your investment objectives with regard to investment quality, maturity, type of bond and geographical location; and
- Marketability in the event you must sell before maturity.*
Individual municipal bonds, issued by states, counties and cities, fund a variety of projects such as schools and hospitals. The interest paid on these bonds is free from federal income taxes and, in some cases, state income taxes-making them the primary investments for tax-exempt income.
Effect of Federal Income Taxes on Yields of Tax-Exempt & Taxable Instruments
6% Tax-Exempt Bond 8% Taxable Investment
Cash Investment $30,000 $30,000
Interest $1,800 $2,400
Federal Income Tax in the 36% Marginal Tax Bracket** $0 $864
Net Return $1,800 $1,536
Yield on Investment After Taxes 6.0% 5.1%
* Subject to market risk and applicable capital gains. Due to fluctuating market conditions, yeild/principal value may be higher or lower if sold prior to maturity. ** Income may be subject to Federal alternative minumum tax. Consult your tax counsel for advice and information concerning your particular circumstances. Neither PriveVest nor any of it's representatives may give tax advice
Corporate bonds are debt securities. They are issued by corporations that need to raise money for working capital or for capital expenditures such as plant construction, equipment purchases, expansion, etc., and are commonly referred to as funded debt.
Unlike stockholders, corporate bondholders do not have ownership interest in the issuing corporation or a voice in the management. In return for their investment, bondholders receive the corporation’s promise to repay principal and interest on the debt. As creditors of the corporation, bondholders receive preferential treatment over common and preferred stockholders in certain instances. When a corporation files for bankruptcy, the claims of creditors (including bondholders) are settled before the claims of stockholders. For this reason, bonds are sometimes called senior securities.
Par value of a corporate bond is usually $1,000. Issues of less than $1,000 are referred to as baby bonds and are not popular with investors because they tend to be less marketable.
Types of Bonds
There are two primary types of corporate bonds: secured and unsecured. The term “secured” is used when the issuer has set aside certain identifiable assets as collateral for the prompt payment of interest and the repayment of principal. In a default (that is, when the issuer has failed to meet its obligations to pay either principal or interest or both), bondholders can lay claim to assets.
Secured Bonds: mortgage bonds, collateral trust bonds, equipment trust certificates
Unsecured Bonds: debentures, subordinate debentures
Bond Rating System
The purpose of the bond rating system is to provide the investors with a simple system of graduation by which the relative investment qualities of a bond may be noted.
Moody’s Note: Bonds in the Aa, A, Baa, Ba, and B groups which are to believed to possess the strongest investment attributes are designated by the symbols Aa1, A1, Baa1, Ba1, B1.
S & P Note: Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative security within the major rating categories.
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