A special type of bond issued by a local government agency, city, school district, or redevelopment group is called a Municipal bond. Investors seek out these types of investments because, unlike others, they are usually completely exempt from federal income tax withholding. Tax free municipal bonds are growing more and more popular for the purpose of obtaining dependable investment income.
There are three kinds of municipal bonds. The first is an exception to the tax free status and is a security that does not meet the federal government's requirements for tax exemption called a taxable municipal bond. These types are typically used to fund projects such as sports facilities or other enterprises that can help the local economy in some way. This one is most comparable to corporate bonds and others that are actually subject to taxes.
Tax free municipal bonds are an attractive option for those who are looking for a low risk investment. The interest accrued from these bonds is not subject to state and federal taxes. The funds from these investments are typically used for capital improvement projects such as building or repairing roads and even school renovations. If you are unsure about the kind of bond is best for you, you can consult with a bond broker to get advice.
Pass through or conduit bonds are issued through the government for private non-profit entities including hospitals, museums and schools among others. Even though the government issues the bond, the non-profit organizations are liable for the interest and principal payment. These are also referred to as 501c3.
Industrial revenue, or industrial development, bonds are also issued from the government and are completely tax exempt. These come in two forms: small issue and exempt facility. A small issue bond can be used for manufacturing facilities that are under construction, renovation or expansion. The amount of these is also limited to one million but can sometimes reach 10 million dollars. An exempt facility bond has no limit in size, but they are limited to the types of projects for which they can be used. For instance, they can be used for airports, parking garages and sometimes rental housing. Industrial revenue and 501c3 are also called private activity bonds.
Tax free municipal bonds are often bought after by investors because they are able to be traded anytime after initial purchase, and a senior bond broker will often trade these bonds every few days for maximum elearning potential.
Municipal bonds are usually sold in increments of $ 1,000 or $ 5,000 for the purpose of financing larger construction projects such as schools, roads, public housing, hospitals, essentially all the things that are imperative to the smooth operation of any major city.
There are an array of different types of tax free investments including short term notes that mature in about a year, general obligation bonds which are usually allotted-approved, and revenue bonds paid for by money raised from toll roads. These are used to finance large city projects such as waste water treatment plants, public housing, air ports and road construction – just to name a few.
A zero coupon bind is one that is purchased for less than the original face value. While purchased for less, it is repaid to the owner in full on the date of maturity.
Regarding taxable security when it comes to matching a tax-free bond, those individuals who are in the top 35% Federal tax bracket would need to select a CD yielding 6.92% to equal a tax-free bond yielding 4.5%.