Investing in Tax-Free Bonds

What is a tax free bond, and how can you invest in such a thing? A tax-free bond invests in municipal bonds. It is a debt security issued by the state or local government. They pose as good investments since they don’t attract tax. They also attract very high interest on their value. How you can invest in tax free bonds is based on a number of factors; most important of all, your knowledge about these bonds.

There are two attractive tax-free bonds in the market namely; the general obligation and revenue bonds. General obligation bonds are state securities meant for raising money for projects like community development, schools, sewers etc. The General Obligation tax free bond is considered as safer in comparison to the Revenue Bond. On the other hand, the Revenue Bond is issued by a state or local government company. Both are available in the market. The interest on your investment comes from the business profits of the issuer.

Deciding on what to invest on can be challenging. However, if you are an average investor with some experience in the market, you can determine what the ideal bonds to buy through equivalent yield formula.

You may want to invest heavily; the tax free bonds provide you with insulation against heavy tax on your investment. There are two thumb rules in the market

o Study the yield potential of the bond you want to invest in, this provides an overview of the benefits. 
o Invest objectively; the value of these bonds is high, as such it’s ideal to invest high enough money to earn high yields unlike when you invest small amounts.

Investing in tax free bonds promises you, as an investor, very good yields on your initial investment. You can choose to invest in either the general obligation or the revenue bond. Each provides an attractive interest on your initial investment. Learning how to project possible earnings is done using the equivalent yield formula. If you have little knowledge about bonds, it’s ideal you study books about investing in this topic.

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