For those who are looking for low risk investment tax exempt municipal bonds are an attractive option. Investors seek this type of investment since they are completely free from federal income tax. There are numerous advantages associated with tax exempt municipal bonds for many investors. They offer tax advantages for the state and local tax situation. These bonds can be beneficial for investors with high tax brackets. The funds for this type of investment is used for projects such as repairing roads and school renovations.
There are many bonds that offer high liquidity and with these bonds it is possible to sell your investment and recover the capital. Though all municipal bonds do not offer high liquidity there is no penalty for tax which is one of the biggest advantages for the investors. These bonds allow your income can grow faster since a large balance is compounded.
Municipal securities consist of short term issues as well as long term issues. Short term issues are used to raise money for a number of reasons for future revenues like future bond issuances and state aid payments. Bonds are sold in order to finance the capital projects over the long term. The bond holder hands over the cash to the issuer and guarantees to pay the amount back within the specified period. The least investment for this type of bond is $5000. There are two types of municipal securities namely General Obligation bonds and Revenue bonds.
General obligation bonds are the most common bonds that come with better rated issues. These bonds provide funds to the government for the purpose of development of the society. The principal and interests are secured by credit of the issuer and supported by the issuers taxing power. They differ from revenue bonds in terms of payments since they offer definite payments to the bond owner. They are the most secure bonds and provide minimum interest rates.
Revenue bonds are issued with the intention of generating income for the future projects. They are exempt from federal and state taxes. They are secured by the revenues that are derived from the tolls. The projects that are financed by the revenue bonds are bridges, hospitals, airports, water treatment facilities, etc.
One of the best ways to value the tax exempt of the municipal bonds is to compare it with a taxable investment. For instance assume that you are in federal tax bracket of 33% and claim $210,000 of taxable income. Now suppose that you want to invest about $30,000 and you consider two investment options out of which one is a tax exempt municipal bond that yields about 5% and other is the tax corporate bond that yields about 7%.
By investing your money in tax exempt municipal bond then you will earn about $1500 without paying any amount of federal income tax. The tax corporate bond will let you earn only $1407 income that will include the deduction of the federal taxes to a 4.7% yield.
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