Tax free bonds are debt securities that are issued to pay for public-purpose projects such as airports, school buildings and roads. Adding these bonds to well-ballanced portfolios makes sense for many investors because the income that is derived from tax free bonds is often exempt from gross income that is taxed by the federal government.
Many financial service providers try to help investors take advantage of this tax benefit by offering a convenient marketplace for investors who wish to add tax free bonds to their portfolios. Here are some tips that can help you use this marketplace to add tax free bonds intelligently to your portfolio.
Research the Issuer’s Listing History:
Most governments and government agencies provide information about the history of their past bond listings. Reading these histories is often worthwhile because it can help you learn information about issuers’ past payment histories that can influence their future bonds’ initial coupon rate.
Research the Issuers’ Bond Ratings:
Nearly all of the governments and government agencies that issue tax free bonds have bonds ratings that vary considerably. Comparing these bond rating in advance is worthwhile because it can help you choose tax free bonds that suit your risk tolerances and investment strategies.
Research the Issuers’ Purchase Terms:
Most bond issuers who list tax free bonds for sale have purchase terms that govern how the bonds are sold to investors. These purchase terms often describe the bonds’ initial offer price, initial coupon rate and the minimum number of bonds that must be purchased to complete a sale. Researching these terms is recommended because it can help you choose tax free bonds that suit your budget and asset allocation strategies.
Compare the Coupon Rates and Maturity Dates That Are Offered:
Tax free bonds have coupon rates and maturity dates that can vary considerably. It is a good idea to compare these coupon rates and maturity dates before you invest because it can help you choose tax free bonds that offer a rate of return on your investment which matches your investment goals.
Examine the Bonds’ Potential for Early Repayment Risk:
Many tax free bonds are issued by government agencies who have the right to repay their bonds early before they mature. This feature can make owning tax free bonds riskier to own for investors who rely on long-term maturity dates to derive income. One way to avoid this problem is to check to see if a tax free bond is eligible for early repayment. This is usually simple to do because reliable bond brokers usually list information about early repayment options in their bond descriptions.
As you might have noticed, adding tax free bonds intelligently to your portfolio requires an organized approach that can help you examine rationally the factors that influence the value of a tax free bond. As a result, feel free to use these tips to help you organize your research on tax free bonds that are offered by investment service providers.
Join our newsletter
Subscribe to get the latest "Engineer Your Finances" content via email.
Leave a Reply