Bond Investing

A bond is defined as an interest-bearing certificate issued by a government or business, promising to pay the holder a specified sum on a specified date.

Common wisdom says bonds are a safe haven from stock market turmoil. Does that mean you should buy bonds if that turmoil comes from recession or inflation?

Complicating the situation is the fact that there is no one-size-fits-all-situations bond. The Treasury Department issues bonds, so do corporations, municipalities and banks. There are short-term bonds and long-term bonds; bonds with pristine credit ratings and junk bonds.

Remember, while bonds may protect you in hard economic times from the deep dives that stocks sometimes take, there is no guarantee you won't lose money. With bonds, you can get hurt while standing on the sidelines.

Stability versus volatility

It's a given that most people, especially as they near retirement and need to reduce volatility in their portfolio, should have a smattering of bonds for stability and to provide fixed-income.

The ratio of bonds to equities and cash depends on your needs and your risk tolerance. We won't specifically address allocation in this article, but we will try to provide some guidance for when it's appropriate to load up a bit more on your bond allocation.

Tax Debt Help - Investing in Bonds

A bond is an interest-bearing or discounted government or corporate security that calls for the issuer to pay you, the bondholder, a specified sum of money, usually at specific intervals, and to repay the principal amount of the security at maturity.

As a bondholder, you essentially have an IOU from the issuer but no corporate ownership privileges, as stockholders do. For more information, select a topic from the drop-down list or scroll down the page.

Issued by states, cities, counties, school districts, housing authorities, hospitals and other municipal agencies, municipal bonds are used to fund local governments and the building of roads, bridges, sewer systems, schools, and other projects.

Types of Bonds

• There are primarily two types of municipal bonds: general obligation bonds and revenue bonds. General obligation bonds are backed by the taxing authority of the issuer, while revenue bonds are backed only by the funds generated from a specific project (e.g., tolls from a bridge or revenues from a water system).
• Bond Ratings
  Municipal securities are rated based on their creditworthiness. General obligation bonds are usually considered safer (all other factors being equal) because their financial backing is derived from the taxing authority of the municipality and is not dependent on any one particular project. Some municipal bonds are also insured by independent insurance companies.
• Bonds and Taxes
  Municipal securities provide a fixed interest payment semiannually and generally are not subject to federal taxation.*

Interest payments received by bondholders, owning bonds issued within their state of residency, are typically exempt from state and local taxes, but not in all states. To compare the yield on a tax-free municipal bond with a comparable taxable bond, use our taxable equivalent yield calculator.Some municipal bonds may be subject to the federal alternative minimum tax. The gain (loss) incurred from purchasing municipal bonds at a discount (or at a premium) may be subject to capital gains (losses) tax assessments.

S. Raines, Sr. Financial Advisor/Tax Preparer