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A guide to municipal bonds and government bonds
If you don't know much about the investment world, bonds are a good place to start. Unlike stocks, bonds do not come with a high amount of risk and it is guaranteed that you will re-gain the money you invested plus some interest. Two of the most popular types of bonds are municipal bonds and government bonds.
What is a bond?
To get started, you need to understand what a bond is. A bond is a debt note from a company. You basically give them money to spend on whatever they need like research and expansion. The company will then re-pay the money they borrowed from you plus the interest amount you agreed to. Depending upon the type of bond you invest in, you could receive interest annually or at the end of the term in a lump sum.
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Bonds are great to add to your portfolio, especially if you are trying to build a diverse portfolio. Since you are guaranteed to make money, they are a low-risk investment. The nice thing about a bond is that you will make back your money, even if the company declares bankruptcy.
What are municipal bonds?
Municipal bonds tend to be one of the most popular types of bond investments. Investors get a nice tax break on the bond depending upon their state or municipality. Municipal bonds are used to fund state or local projects like city parks, buildings, road construction, etc. Since the investors are investing in these projects, the state's like to recognize them with a nice tax break.
The reason why states push for people to purchase municipal bonds is because it is much cheaper from raising money in an alternative manner like a loan. The funds are used to accomplish projects that the government will not provide the state with financial backing for. A lot of good can be done with municipal bonds if people are willing to invest in them. Your rate of return may not be anything too significant, but you are guaranteed to make some money. Only the income you make from the municipal bond is tax free, not the capital appreciation you will receive if you end up selling your bond early.
What are government bonds?
Government bonds are backed by the U.S. government, making them the safest form of bonds. The tax break you will be given is on your federal taxes, it is similar to the tax break on municipal bonds. Since government bonds are extremely safe, they don't have as high of rate as return as municipal bonds and other types of bonds. There are 3 main types of government investments:
- Treasury bonds
- Treasury bills
- Treasury notes
A treasury bond is used to pay for big government investments. War bonds have been a popular treasury bond in the past as it helped the government pay for past wars. Treasury bonds have been around for a long time and they have the highest return rate of all the U.S. treasuries investments.
A treasury bill is a short-term investment that lasts for about 3-6 months. Treasury bills are extremely safe and a great way to add some diversity to a high-risk investment portfolio. Lastly, treasury notes are used as a short term or long-term investment. Normally they average anywhere from a 1-5 year investment. Their rate of return is higher from a treasury bill, but not by much.
You always have the option of investing in both types of bonds and receiving tax breaks at the federal and state level. Bonds are secured investments and provide you with the comfort of knowing you will make back the money you invested plus some interest. They may not make you rich, but at least you will have a comfortable amount of money to use in the future.
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