PrivateBonds.com

Many people shy away from the web when it comes to money and banking services. With the threat of security fraud and concern over stolen identities, many will not consider banking online instead of at their traditional brick and mortar establishments. However, those people are likely missing out on some great new logic when it comes to saving money.

Online services typically one-up the traditional banks by offering high interest savings accounts that earn customers more money than a regular bank. Online accounts also have the convenience of being managed in real-time online so customers will always know how much money they have on hand in savings, allowing them to be more efficient about their financial management. Online accounts also offer services that conventional do so as automatic bill pay and use of ATM cards.

If you haven’t reviewed your checking account rates and fees in awhile, you might want to check out an online savings account and make a change. As time goes by, banks make changes that you may not even be aware of but that are costing you money. What you could be saving, you end up spending in fees. You can also use online checking accounts to save for special events, such as vacations, weddings, or even as an emergency fund. The money is accessible and many online accounts often will connect with your regular bank to make deposits and transfers even easier and more convenient.

While online transactions may seem risky, the reality is that online companies are employing the most advanced security technology to keep your information safe and your identity from being stolen. Security measures are constantly being implemented and upgraded so all customers will be reassured of safety. Crossing over into the online banking world will offer convenience and services you can certainly appreciate and use to your financial advantage.

We’ve all borrowed money, whether it is to purchase our first car, house or even the extension on our home. Now put that into the perspective of a corporation or government - where do their loans come from? Just like us they sometimes require capital to finance a new project or expand into new markets, so where do they get their capital from?

One of the ways they can achieve this cash injection is to raise the money by issuing bonds to a public market. In its simplest form, a bond is a loan for which the lender receives an agreed number of interest payments and in return, the issuer receives the capital that they need in order to finance their project. Here is a quick example to show how this works:

Bond Issuer -> Public Market -> Agree Terms -> Issuer Receives Funding -> Lender Receives Agreed Interest Payments.

The interest rate of a bond is quite often known as the coupon. The issuer not only has to honour the coupon, but also what is known as the maturity date which is when the issuer has to repay the investment (face value) back to the lender.

Here is another example for you to chew over:

You purchase a bond with the face value (investment amount) of $5,000, a coupon (interest rate) of 10%, and a maturity (repayment period) of 10 years.

Now if you do the math, this will mean you will receive $400 of interest for the next 10 years. After those ten years, you will then get your $5,000 back.

So you will have allotted $4,000 in interest over 10 years, plus the original $5,000 that you started with - not bad eh?

So now that you have an understanding of what bonds are, we can look more closely at their specific features.

First of all, bonds are debt they are not equity as like you get when you invest in stocks. When purchasing stocks you naturally become an owner of that corporation, with that come voting rights and a claim to future profits. When purchasing bonds however, as it is a debt, you become a creditor to the corporation or government that is issuing the bond. You also, as a bond holder, have a higher claim on the assets of the corporation/government in the case of bankruptcy. The advantage is that you have a lower risk but with that comes a lower return.

Finally, bond holders do not get a share of future profits as you do if you are a shareholder; you are only applicable for the original investment and the agreed interest repayment.

A private purpose bond is one of the two types of municipal bond separated by The Tax Reform Act of 1986. The other type of municipal bond is a public purpose bond which differs quite considerably to the former.

The key feature of a private purpose bond is that they are solely used to help finance private investments and amenities. Comparatively, a public purpose bond is exclusively for investments that benefit the public, i.e. public facilities or projects that benefit a sizeable community.

The reason why The Tax Reform of 1986 led to the separation of municipal bonds into two types was for a change in the taxation regulations. The taxation regulations are currently quite clear and state that: Private Purpose Bonds are applicable for taxation unless exempted (which is rare). Public Purpose Bonds are exempt from federal taxation.

A municipal bond fund is essentially a mutual fund investment in a municipal bond (i.e. “munis”). As we have already covered, municipal bonds are debt securities issued by a municipality, country or state to fund its capital expenditures.

The reason why these types of bonds are so popular with investors who have high incomes is because of their extremely favourable tax implications - they are exempt from federal taxes and in most cases state taxes too.

A word on the security attributes of a municipal bond fund - although they are backed by the government and are considered low risk rating, municipalities have in the past declared bankruptcy and avoided payouts altogether. So although they are generally low risk, investors should be aware that there are ways that you could lose out should something inadvertently go wrong.

A mortgage bond, as one would assume, is a bond that is directly secured by a mortgage on one or more physical/tangible assets. Mortgage bonds are usually secured by real estate and/or property associated with real estate holdings.

Typically speaking, mortgage backed bonds offer exclusive protection that is rarely offered by other similar bonds. They offer the investor a massive amount of collateral in the form of protection as the asset could potentially be sold off to cover any debt that is owed. However, with this extremely good rate of protection comes the major drawback, these sorts of bonds have fairly low rates of yield, especially when compared to the more traditional corporate bonds and private bonds that are only backed by the corporation’s or municipality’s promise and real time ability to return payments.

A mortgage revenue bond is where the investment is in part subsidised by the government or authoritative entity that supports a certain demographic of low income earners to allow them to make home purchases. This type of bond was most popular in the late 80’s and early turn of this decade when borrowers were faced with an inability to purchase houses due to the depressive state of the US economy.

A revenue bond as its rather apt name would suggest is a type of municipal bond that is specifically guaranteed for repayment through revenues generated solely by an entity or source of revenue directly associated with the purpose of the bond. The revenue stipulated in the legal contract established between the bond holder and issuer is the source of repayment of the principal and interest of the bonds. This comparatively speaking is different from general obligation bonds where a state or local government pledges to use legal sources such as tax revenues to repay bond holders. In addition, the security of the pledge is not as secured as general obligation bonds; however the interest rate of revenue bonds will see higher interest rates.

Simply put, a revenue bond is issued by a locality to financially support a specific public works project. The revenues that this public works project makes are then used to further support the projects existence. Revenue bonds are considered by many to be the second most secure type of municipal bond and are sometimes referred to as municipal revenue bond.

A special assessment bond is firstly a type of municipal bond, which as we have covered in previous articles are debt security bonds issued by a state or municipality to finance capital expenditure. Special assessment bonds are used to financially back a development project and the interest is payable to the investors through taxes levied on the community whom are supposedly benefiting from the specific assessment bond funded project.

In essence, this is a type of municipal bond that is repaid by taxes collected from those who are appreciating (hopefully) the development or service that the project was funded for. An assessment bond is also sometimes referred to as a special purpose bond since the projects that they often fund are for the good of the community. An example; A local community sees their local facilities improved and a recreation facility produced. This not only increases the value of their homes as their neighbourhood sees a rise in value, it benefits them as individuals. However, with increased value come increased taxes, which of course are used to fund the project in the first place.

An official definition would lead us to say that taxable bonds are debt securities whose return to the investors are subject to certain taxes, such as local, state or federal. The vast majority of bonds that are issued are subject to taxes and are therefore applicable as taxable bonds. In the past, when traditional issuers offered tax-free bonds for certain projects are now most commonly issued with interest taxable bonds unless the project benefits the public at an increased level.

Taxable municipal bonds most commonly pay a higher rate of interest than other bonds, however with protection from early redemption and some exemption from state and/or local taxes with which the bonds are issued, it evens itself out. States will usually always use their allotted quantity/value of tax-exempt bonds and therefore issue taxable bonds which are most commonly used to finance private development. Taxable municipal bonds are always issued as private purpose bonds when financing projects such as sports entertainment facilities.

A general obligation bond is one of the most common types of municipal bond within the United States of America. Its common make up is that it is financially secured and guaranteed by state or occasionally local government and their agreement to use authentic and legal resources to honour bond repayment agreements.

The general obligation refers to a pledge which is a set of conditions that state how a local or national government can issue or repay general obligation debt, including its securities. More often than not – as already mentioned – the use of land or property taxes and levying these in order to satisfy the borrowing of the debt requirements. Understandably those who own property are reluctant to lose their property because of unpaid taxes therefore the may consider using a credit agency to make a general obligation pledge for strong credit quality and assign a investment grade rating. This basically means that if property owners are late or miss their property tax payments their tax rate increases and the owner will indefinitely have to pay a higher rate the following year.

It is important to note that state laws determine the conditions of which a local government can issue general obligation debt and these have two forms;

• Limited tax general obligation pledge – Local government to levy property tax to meet debt obligations. It’s limited because the government can choose only a section of the tax that it decides to levy.
• Unlimited tax general obligation pledge – Identical to the limited but the government has a free reign to levy any tax rate they feel is necessary.

A corporate bond is a debt security issued by a corporation and offered to investors. More often than not, the able amount of backing a bond will receive is what the corporation can afford to reasonably pay back, valued by the money the company is making at the time and future projections. Occasionally in certain circumstances, the company will use their physical assets as collateral to back the bonds for investment. Keep in mind that corporate bonds are taxable.

Corporate bonds more often than not pay higher rates of interest than other bonds such as municipal bonds as they tend to be a lot riskier. The reason being is that the investor is backing an individual or group of corporations, rather than a government or state approved project or organisation.

Corporate bond yield has quite a wide spectrum due to the many financial issuers that can be involved. A large, successful corporation may have bonds with a high investment grade value and rating, perhaps AA. However, with that rating comes a relatively low yield but a considerably lower risk of default. Comparatively speaking, high yield corporate bonds that are most commonly found in start-ups carry a higher risk but a greater value of reward.