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Tax Free Municipal Bonds

By: EconomyWatch Date: 23 November 2010

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The Municipal Bonds are normally issued by the State, Local and County governments to have some money to fulfill a project in improving the social situation. As these bonds are are normally backed by taxing authorities these remains Tax Free Municipal Bonds. The Federal Government does not charge any kind of tax to the Municipal Bonds which enables them to make the bonds Tax Free Municipal Bonds. This also makes the profits that are made by the bond owner absolutely tax free as the money the bond owner lends are actually used for the betterment of the state,city or the county.

Municipal Bonds are normally issued by States,Counties and Cities. Some of them also are:

Cities

Towns and Schools

Municipal Authorities As mentioned earlier as well the payments and the premiums paid back to the owner by the issuer of the bond remains free from taxes that are imposed by the federals. Some times the Tax free municipal Bonds are not only free from federal taxation but also remain free from local taxes as well as state imposed taxes.

Tax Free Municipal Yield: Before looking to purchase a municipal bond one needs to understand the whole process of the tax exempt yield works. One should know that the higher the tax is quoted the higher amount yield would be available and one also have to face the higher chances of risks involved with it. If an investor looks to buy a municipal bond which is 5 percent municipal bond at par and they find themselves in the tax bracket of 27 percent one will have to be sure the free yield would be higher than the interest rate of 5 percent. The formula stands in the following way: The rate given by the municipal bonds or the coupon needs to divided by the tax amount bracketed from the tax amount which needs to subtracted from 100.

Type of Municipal Issues: One can find mainly two types of varieties of municipal bonds through which a municipality can give back its bonds or the payments for buying the bonds. One of the ways is the municipality's power of taxing. This types of bonds are normally known as the General obligation Bonds or the G.O.Bonds. This kind of bonds normally to secure the issue uses specific revenue sources.

General Obligation Bond: These bonds or issues are normally better rated and normally considered the most common rated bonds. The state normally issues this kind of bonds and make them Tax Free Municipal Bonds so that the public gets interested and byes this kind of bonds more which enables them to earn more money. As everybody normally thinks that taxes are the most secure money source nowadays and will be in years to come some bond buyers prefer these kind of bonds over other bonds.

Revenue Bonds: There are some issues which rely heavily on the productive ability of the of a particular facility and through other ways from the bond issuer are known as Revenue Bonds. One can find a great variety of issuers. Some of them are:

County and City hospitals for health care.

Bridges, Airports and Tolls are considered as good revenue earners for issuers.

Water companies or other utility companies could use assess to gain money from the utility companies.

One can find some municipal issuers that work with companies that are owned privately and this is considered as the industrial way.

Triple Tax Free Municipal Bonds: The Bond buyers if they buy any particular bond in a particular state in which they live also get the facility of becoming free of those taxes which include all kind of government taxes be it local taxation,federal taxation and state taxation. A bond investor would always like to buy bonds in his own state so that he gets all kinds of taxation out of his way. If he buys one outside the state he would only be liable to have the federal tax discounted from his list of taxation for the money he has earned through Tax Free municipal Bonds.