How to Compare Tax Free Municipal Bonds

Tax free municipal bonds, also called ‘munis’ are government bonds that are free from federal taxation. In many states, you can buy tax free municipal bonds which are also free from the state tariff as well. The following article will tell you how to compare tax free municipal bonds with traditional investments.

Consider GO or General Obligation. General obligation (GO) tax free municipal bonds are used for purchasing new schools, building roads, courthouses and other necessary long term investments. Because the nature of the investment is a necessity and is unlikely to turn out to be unnecessary these are often considered to be a more secure investment.

Consider Revenue Munis. Revenue tax free municipal bonds are issued by state and local government sanctions, such as the water company, in order to enhance facilities or processes or even general maintenance. These are less secure because the return is based on the revenue producing probability of the invested party.

Once you have decided which type of tax free municipal bonds to invest in, compare them with their taxable counterparts. Here is the formula for doing so: Yield divided by (1 minus Tax Bracket) Example: If you are in the 20% tax bracket and the yield on the tax free municipal bond is 4.5% you would do this. 4.5/(1-.20)=5.625% taxable yield equivalent

Compare the estimated taxable yield with taxable investments. If the tax free municipal bond’s taxable yield less than traditional investments then it is better to go with the traditional investment. If it is more than or equivalent then the tax free municipal bond is the better investment.

Tips & Warnings

• If the investing party is non-profit or not for-profit, they are traditionally better off investing in tax-free corporate bonds.
• If the investing party is in a high tax bracket they are usually going to be more successful with tax free municipal bonds.
• Larger investments means a more secure and predictable return on the investment.

By ehow.com

How to buy Corporate Bonds

Corporate bonds are a great way to diversify your portfolio. These types of bonds do pose certain that you need to factor in but they are extremely profitable. With a little research you can greatly reduce your risk and make a ton of money in corporate bonds.

First your going to need a broker. There are many discount brokers to be found online that offer corporate bonds with low transaction cost. Be sure to choose one that offers a big selection of corporate bonds to choose from.

Always buy corporate bonds for major companies. These are companies with huge market caps. These bonds a little less than smaller companies but are a lot safer. Be sure to inspect the companies credit rating. Triple A credit ratings are the highest and safest.

While the terms of the bonds differ greatly avoid buying bonds with long term maturity dates. Even if a company is a safe bet you don't know what is going to happen to the market for them in ten years. Stick to bonds between one year and five years.

Always buy bonds at a discount. There are many great quality bonds you can buy that are at a discount. This is important. We are buying corporate bonds to make money not lose it.

Check out the company issuing the bond. Do they have the biggest market share of their industry? Have they been consistently turning a profit for the past five years. You need to know that the company is going to pay you back your money plus interest.