Municipal bonds are debt obligations issued by counties, cities, redevelopment agencies, special-purpose districts, public utility districts or government bodies to raise money to pay for projects for the public good. These projects may include hospitals, infrastructures, sewers, roads, highways, bridges, schools, parks, etc. Municipal bonds may be general obligations of the issuer or secured by specified revenues. When investing in a municipal bond, you are essentially loaning money to a municipality for the promise to return your principal when the bond matures, plus pay interest (coupon payments) every six months until the bond matures. Municipal bonds are generally federally tax-free, and state tax-free depending on your state of primary residency.
ACAP Trading has over 25 years specializing in tax-free investing. We carry a sizable inventory in various bonds with various ratings and maturities. ACAP Trading offers primary and secondary liquidity of Municipal bonds and offerings can be found on BOLTS™. To view our Bond On-Line Trading System™, please click here.
Municipal bonds in Your Portfolio:
The benefits of using municipal bonds in the bond portion of your portfolio can be impressive. For example, if your income tax rate is 28%, a municipal bond paying 4% interest is actually paying interest at 5.556%. You can easily calculate the comparable yield on a taxable investment, known as the taxable equivalent yield.
Highlights of investing in municipal bonds are:
- Municipal bonds are federally tax-free.
- Municipal bonds are state tax-free, depending on your primary state of residency.
- Municipal bonds are income oriented investments.
- Municipal bonds help fund projects for the public good.
- Municipal bonds are a fairly liquid asset in the secondary market.
- Some bonds are rated, which gives you an idea of the safety of your investment.
- ACAP Trading only requires a 5 bonds minimum investment.
Types of Municipal Bonds
- Municipal High Yield Bonds
- Municipal Zero Coupon Bonds
- Municipal Short Term Bonds (under 5 year maturities)
- Municipal Medium Term Bonds (5-10 year maturities)
- Municipal Long Term Bonds (10-30 year maturities)
Tax consequences of placing tax-free municipal securities into a qualified account
The placement of tax-free municipal securities into a qualified account is deemed to be an anomaly because (1) historically the yield on tax-free municipal securities is less than the yield on taxable securities, (2) the normally lower yield on municipal securities is justified by comparing its yield to the after-tax yield on taxable securities, and (3) the tax-free benefit is lost when “tax-free” securities are placed into a qualified account. The interest received from a “tax-free” security is taxed at ordinary income tax rates at the time it is withdrawn from the qualified account. Therefore the normal rule is that, given a choice, tax-free securities should be placed in a non-qualified account to retain their tax-free treatment.
However, the placement of tax-free municipal securities into a qualified account is suitable when the yield on tax-free municipal securities is higher than the yield on comparable taxable securities. Under such abnormal circumstances, yield-seeking investors whose investable funds reside in a qualified account may reasonably prefer to place the higher-yielding tax-free securities into the qualified account. If tax-free securities yield more than comparable taxable securities, then it is entirely appropriate to maximize the yield on investment by placing such tax-free securities in any account that holds investable funds, even a qualified account.