Buying municipal bonds within your own home state qualifies for the investment to be triple tax free. That means no federal, state or local taxation. Muni Bonds are normally tax exempt on the interest earned federally - at your ordinary income tax bracket. This rule or allowance is meant to promote investing within your local municipality.
Municipal bonds and notes are issued by state and local governments. These municipalities include:
States
Counties and Cities
Towns and Schools
Municipal Authorities
Interest payments on traditional municipal bonds are exempt from federal tax. They are subject to state and local tax.
Tax Free Yield
When looking to purchase muni bonds, a person should understand how tax exempt yields work. The higher the tax bracket, the higher the yield. If an investor is considering buying a 6% municipal bond at par and they are in the 28% tax bracket, the tax free yield would be higher than 6%. The formula is: Municipal stated rate or coupon divided by 100 minus the tax bracket.
The calculation would break down like this:
6% divided by 72 (100-28), which equals 8.33%. This means that to achieve a better return than this 6% coupon bond, you would need equal to or better than 8.33% in a taxable investment. A lower tax bracket would show a lower tax free yield.
$5100 into $40,000 Trading FOREX HERE
Thursday, August 13, 2009
Thursday, May 28, 2009
Yield To Call
Most Municipal Bonds are callable because municipalities normally need to manage their interest rate risk more carefully to handle public Government cash flow and possible short falls.
If a bond is callable, it is very important to be aware of the yield to call. If the investment is called early at a lower price than what you paid, your YTC will be lower. If the call price is higher, then yield is higher.
Usually it is best for call dates to be as far out as possible for an investor. Normally a called bond is an unwanted occurance for an investor. Bonds are usually called when interest rates decline, so an investor will be forced to invest the proceeds elsewhere at lower rates.
Callable bonds are priced to the call date or the maturity date. Bond brokers will price the bond to the call when it's a premium, and price to the yield to maturity when it is a discount bond.
Premium and Discount Bonds
The reason for pricing these bonds differently is twofold. A bond is priced at a premium because the Nominal Yield or coupon rate is higher than current interest rates. Since bonds with higher nominal yields will get called first, it makes sense to price the to the call (ytc). It is also the worse case for the investor. If the bond is called early, the investor will lose the premium faster than if it went to maturity. The yield will be lower if the investment is finished early.
Discount bonds will have a higher yield if they were called early vs. pricing them to maturity. They are not priced to the call normally. Discount debt has a lower nominal yield than the market, so they are less likely to see a call date acted on. Discount bonds are priced to a Yield To Maturity.
Book Recommendation: The Handbook of Fixed Income Securities
If a bond is callable, it is very important to be aware of the yield to call. If the investment is called early at a lower price than what you paid, your YTC will be lower. If the call price is higher, then yield is higher.
Usually it is best for call dates to be as far out as possible for an investor. Normally a called bond is an unwanted occurance for an investor. Bonds are usually called when interest rates decline, so an investor will be forced to invest the proceeds elsewhere at lower rates.
Callable bonds are priced to the call date or the maturity date. Bond brokers will price the bond to the call when it's a premium, and price to the yield to maturity when it is a discount bond.
Premium and Discount Bonds
The reason for pricing these bonds differently is twofold. A bond is priced at a premium because the Nominal Yield or coupon rate is higher than current interest rates. Since bonds with higher nominal yields will get called first, it makes sense to price the to the call (ytc). It is also the worse case for the investor. If the bond is called early, the investor will lose the premium faster than if it went to maturity. The yield will be lower if the investment is finished early.
Discount bonds will have a higher yield if they were called early vs. pricing them to maturity. They are not priced to the call normally. Discount debt has a lower nominal yield than the market, so they are less likely to see a call date acted on. Discount bonds are priced to a Yield To Maturity.
Book Recommendation: The Handbook of Fixed Income Securities
Sunday, April 5, 2009
Revenue Debt - Types of Revenue Muni Debt
Types of Revenue Issues
Transportation - These bonds are issued backed by tolls, fees and other transportation collections.
Utility - These revenue bonds are secured by the income of a public utility.
Industrial - These municipal issues are backed by a corporation's payments back to the municipality.
Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state, federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.
Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.
Custom Search
Transportation - These bonds are issued backed by tolls, fees and other transportation collections.
Utility - These revenue bonds are secured by the income of a public utility.
Industrial - These municipal issues are backed by a corporation's payments back to the municipality.
Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state, federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.
Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.
Custom Search
Thursday, January 15, 2009
Tax Free Investing Ideas - Tax Strategy
The following is a piece written for investors looking for year end stock and bond investment planning.
Year End Investment Ideas and Tax Strategies
"First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in a lower tax bracket next year."
Of course that's ridiculous, but isn't it about the same as the financial community's "Conventional Wisdom" (CW) for year-end tax planning? What about the long-term nature of investing, or the merits of that investment they felt so strongly about in July? What are their motivations, and what discipline thought up these strategies in the first place?
Clearly there are many questions that require answers, but as investors, it should be crystal clear that the object of the investment exercise is to make money... just as much as possible, quickly, legally, and within a low risk environment. The faster it comes in, the more effectively it can be compounded. Otherwise, wouldn't the "CW" be to find as many downers as uppers so that there are no tax consequences? Wouldn't Zero Taxable Gain Investing be the only "smart" investment strategy? A December, 2004 New York Times Money Section article actually suggested that Investment Professionals had an obligation to lose money for clients in order to reduce the tax burden.
Your Financial Professional's perspective may produce smart tax advice but only professional investors (not accountants, attorneys, stockbrokers, financial planners, advisors in general) should be called upon for acceptable investment advice. CPAs may look smarter if you have a lower tax liability, but many of them go too far with a calendar year focus that ignores the realities of an emotional and cyclical investment environment. Take last year's Merck for example. It has nearly doubled in Market Value since you were told to sell it last November... who'da thunk it! Why didn't you buy more (of this and many other high quality losers) instead of selling? Fortunately, not all professionals are into losing money. In fact, in nearly thirty years of dealing with hundreds of Accountants and other advisors, not even a handful have suggested that clients should take losses on fundamentally sound securities, Equity or Fixed Income. Just think if you had taken your dot.com profits in '99, purchased the downtrodden profit making companies of the time, and paid the ugly taxes. The value companies didn't crash. They've rallied for nearly seven years!
The key issue in considering a capital loss is the economic viability of the investment... not your tax situation! A key element of The Working Capital Model (for investment portfolio management) is to eliminate the weakest security in a portfolio every time the Market Value of the portfolio establishes a significantly new "All Time High" profit level (an ATH). My definitions may be different than those you are used to: (1) Profit = Total Market Value - Net Portfolio Investment, (2) A "weak" security is a stock that is no longer rated Investment Grade by S & P, or no longer traded on the NYSE, or no longer dividend paying, or no longer profitable. Income securities whose payout has fallen to way below average (or risen to an unsustainable level) could also be culled at an ATH. Securities that have fallen considerably in Market Value for no apparent reason (other than recent news or changing interest rate expectations) are referred to lovingly as "Investment Opportunities". This is what you look for while trying to reinvest your profits... like last year's MRK. By the way, switching from the strong asset class to the weaker one as a "hedging strategy" or vice versa (as a greed motivated speculation) is simply an attempt at "market timing", not a "sophisticated" or "savvy" adjustment to your asset allocation. Asset Allocation is always a function of personal factors and never a function of asset class (Equities and Income Generators) directional speculation.
So what happens if a new portfolio ATH is achieved in February or August instead of in November or December? (Note that the financial community only preaches tax loss strategies during the last calendar quarter.) Should you unload all the weak issues at the same time, even those purchased just a few months ago? Management of your portfolio requires the disciplined application of consistent rules and guidelines, and every manager will develop his or her own style. But in a high quality, properly diversified, income generating portfolio, (1) the number of weak issues will generally be small and (2) the probability of escaping with only a minimal loss very real. Keep in mind two basic investment axioms: There is no such thing as a bad profit, regardless of the tax implications; and no matter how you may rationalize, there's no such thing as a good loss. So, sure, if a loss should be taken due to an ATH in February, bite the bullet on the one security (only one) with the declining fundamentals (A Merrill Lynch/CNN/CFP opinion is not a fundamental.) If there are none, good job!
Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced them or, conversely, just how frequently they have watched them disappear beneath the waves of a correction. (Like gamblers retuning from Vegas... no one ever seems to lose!) Similarly, most financial professionals will counsel their charges to let their profits run, particularly around year-end. Surely, speaketh the CW prophets, these profits will hang around until next year, thus deferring those terrible taxes! (Worked real well at year-end '99, you'll recall.) Don't think for a moment that anyone knows what will happen this time around the rally pole, particularly in those ridiculously priced ETFs, which are put together with the same kind of spit and duct tape used for the dot.coms. Always take your profits too soon, because you can't get poor that way!
First thing Monday morning I'm going to: (1) Call my accountant to tell him that I'm going to help him reduce his tax burden by not paying him, (2) continue to view the Investment process in cyclical rather than calendar terms, (3) limit my tax liability by how I invest, not by taking unnecessary losses, (4) continue to make as much money as possible, as quickly and safely as possible, and (5) contact the media, my political representatives, and anyone else I can think of that will help in the fight to abolish the taxation of all investment and retirement income.
Steve Selengut www.valuestockbuylistprogram.com Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
The Handbook of Fixed Income Securities
More On Tax Free Municipal Bonds
Year End Investment Ideas and Tax Strategies
"First thing Monday morning I'm going to march into my boss's office and demand a pay cut so that I'll be in a lower tax bracket next year."
Of course that's ridiculous, but isn't it about the same as the financial community's "Conventional Wisdom" (CW) for year-end tax planning? What about the long-term nature of investing, or the merits of that investment they felt so strongly about in July? What are their motivations, and what discipline thought up these strategies in the first place?
Clearly there are many questions that require answers, but as investors, it should be crystal clear that the object of the investment exercise is to make money... just as much as possible, quickly, legally, and within a low risk environment. The faster it comes in, the more effectively it can be compounded. Otherwise, wouldn't the "CW" be to find as many downers as uppers so that there are no tax consequences? Wouldn't Zero Taxable Gain Investing be the only "smart" investment strategy? A December, 2004 New York Times Money Section article actually suggested that Investment Professionals had an obligation to lose money for clients in order to reduce the tax burden.
Your Financial Professional's perspective may produce smart tax advice but only professional investors (not accountants, attorneys, stockbrokers, financial planners, advisors in general) should be called upon for acceptable investment advice. CPAs may look smarter if you have a lower tax liability, but many of them go too far with a calendar year focus that ignores the realities of an emotional and cyclical investment environment. Take last year's Merck for example. It has nearly doubled in Market Value since you were told to sell it last November... who'da thunk it! Why didn't you buy more (of this and many other high quality losers) instead of selling? Fortunately, not all professionals are into losing money. In fact, in nearly thirty years of dealing with hundreds of Accountants and other advisors, not even a handful have suggested that clients should take losses on fundamentally sound securities, Equity or Fixed Income. Just think if you had taken your dot.com profits in '99, purchased the downtrodden profit making companies of the time, and paid the ugly taxes. The value companies didn't crash. They've rallied for nearly seven years!
The key issue in considering a capital loss is the economic viability of the investment... not your tax situation! A key element of The Working Capital Model (for investment portfolio management) is to eliminate the weakest security in a portfolio every time the Market Value of the portfolio establishes a significantly new "All Time High" profit level (an ATH). My definitions may be different than those you are used to: (1) Profit = Total Market Value - Net Portfolio Investment, (2) A "weak" security is a stock that is no longer rated Investment Grade by S & P, or no longer traded on the NYSE, or no longer dividend paying, or no longer profitable. Income securities whose payout has fallen to way below average (or risen to an unsustainable level) could also be culled at an ATH. Securities that have fallen considerably in Market Value for no apparent reason (other than recent news or changing interest rate expectations) are referred to lovingly as "Investment Opportunities". This is what you look for while trying to reinvest your profits... like last year's MRK. By the way, switching from the strong asset class to the weaker one as a "hedging strategy" or vice versa (as a greed motivated speculation) is simply an attempt at "market timing", not a "sophisticated" or "savvy" adjustment to your asset allocation. Asset Allocation is always a function of personal factors and never a function of asset class (Equities and Income Generators) directional speculation.
So what happens if a new portfolio ATH is achieved in February or August instead of in November or December? (Note that the financial community only preaches tax loss strategies during the last calendar quarter.) Should you unload all the weak issues at the same time, even those purchased just a few months ago? Management of your portfolio requires the disciplined application of consistent rules and guidelines, and every manager will develop his or her own style. But in a high quality, properly diversified, income generating portfolio, (1) the number of weak issues will generally be small and (2) the probability of escaping with only a minimal loss very real. Keep in mind two basic investment axioms: There is no such thing as a bad profit, regardless of the tax implications; and no matter how you may rationalize, there's no such thing as a good loss. So, sure, if a loss should be taken due to an ATH in February, bite the bullet on the one security (only one) with the declining fundamentals (A Merrill Lynch/CNN/CFP opinion is not a fundamental.) If there are none, good job!
Profits are the holy grail of investing. Few people will admit just how infrequently they have experienced them or, conversely, just how frequently they have watched them disappear beneath the waves of a correction. (Like gamblers retuning from Vegas... no one ever seems to lose!) Similarly, most financial professionals will counsel their charges to let their profits run, particularly around year-end. Surely, speaketh the CW prophets, these profits will hang around until next year, thus deferring those terrible taxes! (Worked real well at year-end '99, you'll recall.) Don't think for a moment that anyone knows what will happen this time around the rally pole, particularly in those ridiculously priced ETFs, which are put together with the same kind of spit and duct tape used for the dot.coms. Always take your profits too soon, because you can't get poor that way!
First thing Monday morning I'm going to: (1) Call my accountant to tell him that I'm going to help him reduce his tax burden by not paying him, (2) continue to view the Investment process in cyclical rather than calendar terms, (3) limit my tax liability by how I invest, not by taking unnecessary losses, (4) continue to make as much money as possible, as quickly and safely as possible, and (5) contact the media, my political representatives, and anyone else I can think of that will help in the fight to abolish the taxation of all investment and retirement income.
Steve Selengut www.valuestockbuylistprogram.com Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
The Handbook of Fixed Income Securities
More On Tax Free Municipal Bonds
Tuesday, September 30, 2008
Tax Free Municipal Bonds -- Are They Right for You?
Tax free municipal bonds are an alternative investment for those looking to diversify their investment holdings in a tax-free manner, but they may not be right for everyone. There are several things to consider when making the decision on whether or not to invest in these. Let's take a look at some of those considerations.
First, let's take a look at just what a tax-free municipal bond, or MUNI for short, is. A MUNI is a bond issued by a city, state, or county government to finance some new taxpayer-financed project. These projects could include things like highway improvements, new schools, and new libraries. The income received from these bonds are always free from Federal income tax, and may be free from state income tax as well, provided the investor resides in the same state as the source of the bonds.
How do you know if MUNI's are right for you? The short answer is, the higher your income tax bracket, the more benefit you will receive from a tax-free bond. If you were to compare a taxable bond with a tax-free MUNI, then you would divide the tax free yield of the bond by 1 - your income tax bracket. For instance, if your MUNI is a 5% yield bond and your income tax bracket were 15%, then you would divide 5 by .85 to get an equivalent yield of 5.88%. So, an equivalent taxable bond would need to yield 5.88% to enjoy the same income benefit as the tax-free bond.
Another motivation for investing in tax free municipal bonds lies completely outside of the financial arena, and that is the desire to help support local projects. By investing in your city's projects, you can support your local economy and overall community. The income derived from the bonds can be the icing on the cake in this particular instance!
A final thing to consider when deciding on whether or not to invest in any particular tax-free MUNI is the financial solvency of the issuing entity. In general terms, financial analysts recommend that the issuing party should have the following minimum characteristics:
1. The population of the entity should be at least 10,000
2. The entity should have a diverse economy with many sources of income - No one company towns here.
3. The entity should have a long history of prompt interest payments on it's bonds.
Any bonds that fall short of these minimum criteria should, for the most part, be considered far too risky for the average investor's portfolio.
As with any investment, careful consideration and research should be done before making the final decision to invest. Tax-free municipal bonds can be a great way to earn some non-taxable income, provided you do your homework. So, are tax-free MUNI's right for you?
For lots of other investment and personal finance information, be sure to visit Personal Finances Blog today. There you will find information on everything from money merge accounts to Money Market Savings Accounts.
Finance and Investment Books
First, let's take a look at just what a tax-free municipal bond, or MUNI for short, is. A MUNI is a bond issued by a city, state, or county government to finance some new taxpayer-financed project. These projects could include things like highway improvements, new schools, and new libraries. The income received from these bonds are always free from Federal income tax, and may be free from state income tax as well, provided the investor resides in the same state as the source of the bonds.
How do you know if MUNI's are right for you? The short answer is, the higher your income tax bracket, the more benefit you will receive from a tax-free bond. If you were to compare a taxable bond with a tax-free MUNI, then you would divide the tax free yield of the bond by 1 - your income tax bracket. For instance, if your MUNI is a 5% yield bond and your income tax bracket were 15%, then you would divide 5 by .85 to get an equivalent yield of 5.88%. So, an equivalent taxable bond would need to yield 5.88% to enjoy the same income benefit as the tax-free bond.
Another motivation for investing in tax free municipal bonds lies completely outside of the financial arena, and that is the desire to help support local projects. By investing in your city's projects, you can support your local economy and overall community. The income derived from the bonds can be the icing on the cake in this particular instance!
A final thing to consider when deciding on whether or not to invest in any particular tax-free MUNI is the financial solvency of the issuing entity. In general terms, financial analysts recommend that the issuing party should have the following minimum characteristics:
1. The population of the entity should be at least 10,000
2. The entity should have a diverse economy with many sources of income - No one company towns here.
3. The entity should have a long history of prompt interest payments on it's bonds.
Any bonds that fall short of these minimum criteria should, for the most part, be considered far too risky for the average investor's portfolio.
As with any investment, careful consideration and research should be done before making the final decision to invest. Tax-free municipal bonds can be a great way to earn some non-taxable income, provided you do your homework. So, are tax-free MUNI's right for you?
For lots of other investment and personal finance information, be sure to visit Personal Finances Blog today. There you will find information on everything from money merge accounts to Money Market Savings Accounts.
Finance and Investment Books
Thursday, July 17, 2008
Callable Bond - Muni Bond Call Features
Most municipal bonds are callable because municipalities need to protect their interest rate risk and fiscal spending more than private corporataions. Corporate bonds can be callable, but more munis - per bond have this feature.
A bond being called means the issuer has redeemed the security early because they wish to refinance the notes or bonds at a lower rate or is looking to retire the debt completely. This can only be done based on an upfront disclosure of the call dates, prices and options on when these can be redeemed and even the circumstances in many cases.
Each municipality is different and each bond offering has it's own features but most issues will have multiple or continuing call dates throughout the life of the muni issue. This allows the city, state or other municipality have greater flexibility on when the bond can be called. Interest rate environments change and should rates decline sharply but passed a one time call date, it could damage the issuer. This is why many muni issues have multiple callable dates.
The most common reason why any bond is called is that interest rates have declined enough where the paying interest rate to bondholders is too expensive or well above market. Calling back early allows the municipality to come out with cheaper bonds (interest cost to them) at a lower rate.
Changing maturity schedules could be another reason redeem muni issues early.
Recommended Muni Bond Reading
The Handbook of Municipal Bonds (Frank J. Fabozzi Series)
A bond being called means the issuer has redeemed the security early because they wish to refinance the notes or bonds at a lower rate or is looking to retire the debt completely. This can only be done based on an upfront disclosure of the call dates, prices and options on when these can be redeemed and even the circumstances in many cases.
Each municipality is different and each bond offering has it's own features but most issues will have multiple or continuing call dates throughout the life of the muni issue. This allows the city, state or other municipality have greater flexibility on when the bond can be called. Interest rate environments change and should rates decline sharply but passed a one time call date, it could damage the issuer. This is why many muni issues have multiple callable dates.
The most common reason why any bond is called is that interest rates have declined enough where the paying interest rate to bondholders is too expensive or well above market. Calling back early allows the municipality to come out with cheaper bonds (interest cost to them) at a lower rate.
Changing maturity schedules could be another reason redeem muni issues early.
Recommended Muni Bond Reading
The Handbook of Municipal Bonds (Frank J. Fabozzi Series)
Tuesday, April 15, 2008
Triple Tax Free Muni - Federal, State, Local Tax Exempt
Traditional tax free municipal securities are normally tax free at the federal level but subject to state and local taxation.
Some investors can receive interest on Municipal bonds exempt (tax free) from federal, state and local tax. In most states, if you buy a muni bond issued in your home state, that investor can avoid paying the 3 levels of taxation.
This is why most investors buy muni investments issues in their home state. Familiarity and the tax free benefits make that a wise tax based choice.
Another situation that allows for triple tax free status is when a bond is bought that is issued by a U.S. Territory. Examples include Puerto Rico, US Virgin Islands and Guam.
Creating a portfolio of municipal bonds makes sense, because of the exempt status at the federal level, the tax free yield, the credit quality and the possible opportunity to buy muni bonds that can take advantage of the triple taxation exemption.
401k Retirement Accounts
Bond Yields
Some investors can receive interest on Municipal bonds exempt (tax free) from federal, state and local tax. In most states, if you buy a muni bond issued in your home state, that investor can avoid paying the 3 levels of taxation.
This is why most investors buy muni investments issues in their home state. Familiarity and the tax free benefits make that a wise tax based choice.
Another situation that allows for triple tax free status is when a bond is bought that is issued by a U.S. Territory. Examples include Puerto Rico, US Virgin Islands and Guam.
Creating a portfolio of municipal bonds makes sense, because of the exempt status at the federal level, the tax free yield, the credit quality and the possible opportunity to buy muni bonds that can take advantage of the triple taxation exemption.
401k Retirement Accounts
Bond Yields
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