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Bonds
Treasuries
These are bonds issued by the US government and are typically in
3 categories:
- US Treasury bills – short term maturities to a year
- US Treasury notes – intermediate term to 10 year maturities
- US Treasury bonds – 10 – 30 years
These issues are considered to be one of the safest investments
and carry a special benefit: income earned is exempt from both local
and state taxes.
Municipal Bonds
Slightly more risky than treasuries but still considered quite safe,
the true benefit of munis is the fact that the federal government
cannot tax interest on state and local bonds. In addition, to make
municipal bonds more attractive to their own citizens, some local
governments will not tax them, allowing for a triple tax exemption
-- free from local, state and federal taxation. Although the coupon
rate may be lower than taxable equivalent bonds, the ultimate benefits
and risks depend upon your tax bracket.
Some tax-free municipal bonds are subject to Alternative Minimum Tax (AMT). When considering an investment of this type, investors who are subject to AMT will want to pay special attention to tax implications, as this tax will reduce their overall anticipated rate of return. Please consult your tax advisor to learn more about your personal situation prior to investing.
Corporate Bonds
Being at the top of the risk continuum, corporate bonds provide
the greatest reward and the highest risk. This risk is conveyed
to the investor through a ratings system. This rating is determined
by two major reporting agencies – Moody’s and Standard
& Poor’s – and is based on the anticipated ability
of the company to pay its debts.
Agency Bonds
Bonds in this category, although not a product of the US Government,
are issued by government agencies and are subordinate only to direct
obligations of the US Treasury, making them quite safe for investors.
These include Collateralized Mortgage Obligations (CMOs), such as
the Federal National Mortgage Association (FNMA), and Callable Agency
Issues such as the Federal Home Loan Bank System (FHLB). As with
any investment that you may be considering, it is crucial that you
understand all characteristics of this investment issue.
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