A surety bond is in essence a three way contract between a principal, obligee, and a surety company. The principal is the person who will perform certain duties outlined in a contract. The obligee is a person or part who is benefiting from said duties and requires protection to ensure completion. The surety is a third party that “vouches” for the principal in case the principal fails to fulfil its obligations.

Surety bonds are most often used in service based business where there’s some form of up front payment followed by a service and a final payment. One example is a construction performance bond. Often times, construction projects are paid at certain intervals as the principal meets certain goals. Obligees don’t want to risk having issues with completion so generally they require the principal have a surety bond to cover the cost of getting a new contractor should a project go awry.

Here’s a short list of other industries and professionals that commonly are required to have surety bonds to operate:
-Auctioneers
-Auto Dealers
-Contractors
-Custodians
-Health clubs
-Hunting Guides
-Insurance Brokers
-Janitorial Businesses
-Notaries
-Payday Loan Stores
-Telemarketing Companies
-Travel Agents

Most tax free municipal bonds are issued by a government entity who wants to encourage financial investment in community.  Your investment dollars in tax free municipal bonds go toward building roads, sewers, and other infrastructure projects.  The goal of a tax free municipal bond is to generate income and pay tax exempt dividends to investors.  Tax free municipal bonds permit interest yield to be free of federal tax – and sometimes state and local tax as well.

What Qualifies a Tax Exempt Municipal Bond?

Not all municipal bonds are tax free or tax exempt.  In most cases, tax free municipal bonds are strictly geared towards public works, where investment dollars go toward projects to improve public infrastructure.  These tax free municipal bonds are also called general obligation bonds.

However, the type of project for which a municipal bond is issued can affect the tax status of the bond.  A revenue bond is a municipal bond issued to benefit private for-profit activity, such as a baseball stadium or an airport.  These types of revenue bonds may be subject to the federal alternative minimum tax.

How Can You Benefit from Tax Free Municipal Bonds?

You can benefit from a tax free municipal bond depending on your tax status.  Though tax free municipal bonds do provide all investors with tax exempt status on dividends and interest, not all investors will enjoy the potential yield.

For instance, an investor in a higher tax bracket, say 33%, can most likely enjoy a better interest return on a tax free municipal bond than a corporate bond with a similar interest rate.  By contrast, a lower tax bracket investor, say in the 15% range, will not reap as much interest yield with a tax free municipal bond than a corporate bond of the same rate.  It is always recommended that you check with an investment broker to determine whether a tax free municipal bond investment is right for you.

Remember that tax free municipal bonds may also be tax exempt from state and local taxes.  When investing in tax free municipal bonds, keep in mind the potential state tax burden that can be saved as well.

The tax exemption status of tax free municipal bonds offers a great way for some investors to protect their investment income from double taxation at the federal and state level.  Check with your investment broker about how you can allocate part of your portfolio wealth in these tax havens.

What Are Private Activity Bonds?

Private activity bonds are issued by a governing agency, such as cities or states, for the purpose of helping raise money for a private company.  Generally, municipal bonds are issued for public works such as streets and sewers.  But other private entities that provide a service to the general public may be eligible to receive special private activity bond funds.  Groups such as zoos, hospitals, and professional baseball stadiums are examples of private activity bonds.

Considerations of Investing in Private Activity Bonds

Though private activity bonds are issued by governing agencies, they do not always carry the same tax advantages.  Regular general obligation municipal bonds offer tax exemption status for interest earned.  This can be an attractive advantage to high tax bracket investors.  However, since private activity bonds are allocated to the benefit of non-essential works and other private companies, they are subject to the alternative minimum tax on all interest earned.

Investment Strategies for Private Activity Bonds

1. Tax Considerations – If you are an investor who also wishes for the tax advantages of a tax free municipal bond, look for a private activity bond that offers tax exempt status.  Some private companies that are non-profit and provide a higher importance public service will be eligible for tax exemption with their private activity bond.  Investors within a higher tax bracket can benefit most from tax exemption.  However, investors in lower tax brackets may benefit more by buying private activity bonds with an alternative minimum tax obligation.
2. Higher Yield – Private activity bonds generally do not carry the financial backing of the issuing government.  However, that doesn’t mean that private activity bonds are generally rated lower by the main rating agencies.  You can still find private activity bonds with a reasonable yield rated at A or higher.
3. Where to Buy – Investing in private activity bonds is easy for the investor who knows where to look.  Private activity bonds are issued directly from governing entities just the same as regular municipal bonds.  Check with websites like the US Department of Treasury for information about newly released private activity bonds.  You can also purchase private activity bonds through most any major brokerage house.
4. Research the Project – Private activity bonds are for the benefit of a private corporation, not a government funded agency.  Just as you research companies for stock investing, be sure to know the extensive financial history of the company benefiting from the bond and whether their financial projections will help them complete the public project assigned to them.

The issuance of private activity bonds dropped a dramatic 52% from 2007 to 2008.  It is obvious that economic indicators are a big influence on how and to whom private activity bonds are issued.  If you are interested in allocating a portion of your portfolio to private activity bonds, be sure to perform extensive research in order to assure that your money will be in a safe place.

Of course, a municipal bond investment is not a way to generate annual double digit returns, but they are a key part of a sound, diversified investment strategy.

 What are Municipal Bonds?

Municipal bonds are a debt instrument issued by government agencies, such as cities, counties, or state governments. If you are investing in municipal bonds, they typically fall under one of two categories:

• General Obligation Bonds (GO Bonds) – These bonds are backed by the ability of the issuing agency to tax its constituents.  GO Bonds are mainly used to help finance public works, such as new sewers, new roads, or even a new baseball stadium.
• Revenue Bonds – Revenue bonds are issued by governing agencies to raise money or create revenue for sanctioned entities, such as hospitals or public zoos.  These bonds help build infrastructure and are also backed by the taxability of the issuing government.

 What Do Municipal Bond Investments Offer as an Investment Strategy?

When you consider municipal bond investment, there are a number of other factors to evaluate, including tax advantages, income stream desires, and interest yield.  Of course, a high-interest yield bond is usually the most desirable, and you also want to opt for a muni with a high yield and good credit rating.

Municipal bond investment may offer a yield at maturity or stream of income option, depending on the issuing agency.  In many cases, bond issuers will make regular interest payments on a muni, providing you with a nice stream of income.  However, others may wait to pay the full interest yield at maturity.

Municipal bond investment also requires you to consider the tax advantages.  Municipal bonds may be issued as a tax-free or a taxable instrument.  Depending on your income bracket, you can save money on taxes with municipal bond investment.  Check with your financial advisor for which is best for you.

Investing Municipal Bonds: Risk Factors

Investing in municipal bonds doesn’t come without financial risk.  Each government bond is rated by a professional rating agency, such as Standard & Poor’s or Moody’s.  The rating agency will research the financial strength of the issuing government to repay a bond, as well as the strength of the local economics.  A muni issued by a thriving and growing community will have a much better rating than one from a city in economic decline and high unemployment.

To be as safe as possible with your municipal bond investment, consider investing in a government that has a good history of bond repayment, has a growing population, and a diverse economy.

Municipal bond investment is a practiced and low-risk investment strategy.  Though yields are not the best compared to all of your financial instrument options, you can generate a good and secure stream of income from municipal bond investment, as well as enjoy tax advantages from government issued bonds.  However, always be sure to check the credit rating of the government bond before investing to ensure that you have a low-risk option.

 What are High Yield Municipal Bonds?

 Municipal bonds, or “munis,” are debt instruments issued by a municipality, such as a city or county for the purposes of public works.  Your sewers, streets, are bridges are in part funded from capital raised from the issuance of municipal bonds.

 Municipal bonds are usually a good investment because they are most often conservatively rated at A or better by the three major rating agencies.  Traditionally, the trade off for a low risk municipal bond is the lower interest rate.  However, there exists a brand of municipal bond yields that are higher than the average and still provides a relatively conservative low risk rating.

 Municipal bond yields at higher interest rates are offered by many states and larger cities.  These types of high yield municipal bonds offer higher interest rates in exchange for a higher risk.  Although the risk is higher, the default rate on high yield municipal bonds is still lower than corporate high yield bonds.

 Advantages of Buying High Yield Municipal Bonds

For the average investor who wants to allocate a portion of his or her wealth into low risk bonds, buying high yield municipal bonds offer a spectrum of benefits and advantages.  Here are just a few:

• More Interest – Buying high interest municipal bonds gives an investor a safer way to make more money.  Though yields are not exceptional compared to prudent stock or real estate investing, municipal bond yields can still provide a sure way to make a reasonable rate of return on invested wealth.
• Tax Free Income – Buying high yield municipal bonds can also offer an added advantage of tax exemption.  Most general obligation municipal bonds are issued with tax free status, meaning that all dividends and interest earned is free from federal tax, and in many cases, exempt from state tax as well.
• Low Default rates – Buying high yield municipal bonds are riskier than normal municipal bonds, but still safer than many corporate high yield bonds.

Risks of Buying High Yield Municipal Bonds

Risk still exists for any type of uninsured investment.  Below are a few risks you may encounter from buying high yield municipal bonds:

• Higher default than regular municipal bonds – With higher interest comes a higher default rate.  Generally, high yield municipal bonds are backed by the assets and income produced from public projects, such as toll bridges, but default rates of 8% to 44% are not uncommon for lower rated bonds.
• Rates may fluctuate – Governments have cash flow problems too.  Sometimes a project is cancelled in the middle of construction, making the value of a bond specific to that project to drop on the secondary market.
• Lower yield than corporate bonds – Though buying high yield municipal bonds can bring in higher income than regular munis, corporate high yield bonds still have an even higher interest average.

 Always speak with a financial advisor before buying a high yield municipal bond.  However, with prudent research and strategy, a municipal bond yield may be a good choice for portfolio allocation.

A bond is an investment instrument providing the investor with a pre-determined rate of return and duration.  Usually investors will find both short term (3 years or less) and longer term (up to 20 years) bonds with a fixed interest rate.  However, it is not uncommon for bonds to be sold from investor to investor during the term of a bond.  And because current market interest rates are flexible and change frequently, bond convexity calculation is required to help address the changes in price of a bond on the secondary market.

What Is Bond Convexity?

Bond convexity is a helpful calculation tool to compare two or more different bonds, their current rate of return, and their market risk.  Fluctuations in market interest rates have a tremendous impact on bond convexity.  A bond with a coupon rate, or a pre-determined schedule of dividend payments, can sell for a higher or lower price depending on the current market interest rate.  A bond with a higher coupon rate selling in a market with lower interest will attract a higher price from another investor.  Conversely, a lower coupon rate in a market of higher interest rates will provide a reduced yield, and thus, will sell for a lower price.  Generally, the higher the coupon rate is, the lower the convexity the bond will be.  Zero coupon bonds with only one interest payment at maturity have the highest convexity.

How is Bond Convexity Calculated?

Consider a matrix where the x-axis is price, while the y-axis is yield.  Considering all factors remained the same, you would predict that a straight diagonal line represents a convexity tangent.  A higher price results in a corresponding lower yield.

However, market conditions are not always the same.  Consider that the bond convexity tangent is a bowl shape (convex).  The higher the convexity, the deeper the bowl will be.  Therefore, the actual bond price changes within the yellow area of the illustration below based on current market interest rates and the duration of the bond.

For example, you are in the market to purchase either Bond I or Bond II.  Both have the same interest rate and duration.  Bond I is has a higher credibility rating from Moody’s, while Bond II is a zero coupon bond.  A higher rating means there is less risk for Bond I, thus it has a smaller convexity.  Bond II has a higher convexity since it provides a set yield at maturity, thus it is more susceptible to market fluctuations.  By comparing the bond convexities, you can determine as an investor which risk you would rather take with your purchase.

Bond convexity is not for the faint of heart.  It is a complex calculation which can be found using online calculators or pre-programmed Excel functions.  However, with bond convexity aids, you have the tools needed to determine the right bond for your investment needs.

What is a Zero Coupon Municipal Bond?

Municipal bonds, or “munis,” are a debt instrument issued by government entities, such as cities, counties and states.  Generally munis are used to generate capital for public improvements, such as sewers and roads.  Munis are similar to a corporate bond in that they are rated by credit agencies such as Moody’s and S & P.

Most municipal bonds have a coupon rate, which pays a regular dividend during the term of the bond until maturity.  However, zero coupon municipal bonds were introduced in the early 1980s for investors who were not interested in a regular income stream, but rather wanted the benefit of purchasing a short-term, low risk bond with a single interest payment at maturity.  Zero coupon municipal bonds offer no interim “coupons,” or dividend payments.

Benefits of a Zero Coupon Municipal Bond

There are many benefits for investors who allocate part of their wealth into zero coupon municipal bonds.

• Tax Free – The government wants to encourage investment in public works.  Thus, most zero coupon municipal bonds are tax exempt, making them an attractive alternative to corporate bonds.  Generally, an investor within a higher tax bracket will benefit the most from a tax free zero coupon municipal bond.

• Better Credit Rating – Zero coupon municipal bonds are rated by at least one of the major rating agencies.  A majority of all zero coupon municipal bonds generally are good quality and are rated A or better.  In fact, many zero coupon municipal bonds carry insurance guaranteeing from default.  These bonds usually are rated AAA or better.

• Low Minimum Investment – Since zero coupon municipal bonds offer only a single interest payment at the maturity date, they are usually heavily discounted from the face value.  For instance, a 20-year, $20,000 zero coupon municipal bond may sell for about $6,700.  At maturity in 20 years the bond will pay $20,000, usually tax free.

• Liquidity – Zero coupon municipal bonds have many ranges of terms.  There are many short-term zero coupon municipal bonds in the 3 to 5 year maturity range.  This offers investors great liquidity in being able to sell the bond if they are in need of cash during the term.

Where Can You Buy a Zero Coupon Municipal Bond?

Investors can purchase zero coupon municipal bonds directly from the issuing government when the bonds are first issued.  There are many websites that offer information about new zero coupon municipal bond issues, such as the US Department of the Treasury.

However many investors do not wish to perform the research for newly listed zero coupon municipal bonds and would rather purchase through an investment brokerage house.  Most major brokerage firms deal with secondary sales of zero coupon municipal bonds.  Check with your investment broker if you are interested in putting part of your wealth in zero coupon municipal bonds.

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.

Municipal bonds are debt instruments issued by government agencies, such as cities or counties, with the intention of raising capital and funds for public works.  Allocating a certain percentage of your wealth in this type of low risk bond is smart advice; however, even a low-risk investment does have an element of risk.

 What are Insured Municipal Bonds?

Not all municipal bonds are created equal.  For investors who want the safest and securest investment, insured municipal bonds offer guaranteed protection and returns.  If the government agency who issues a bond defaults on the bond and is unable to make scheduled interest payments, the insurer will step in and pay the guaranteed interest rate.  The good news is that investors do not pay any more for the insured municipal bond since the premium is paid by the issuer.

Why Invest in Insured Municipal Bonds?

When you invest part of your wealth in insured municipal bonds, you are ensuring that your funds remain safe.  With the added assurances and the unconditional guarantee of the insurer, you can rest assured that your money will grow at a guaranteed pace.  Although insured municipal bonds are not the highest interest or yield investment, where else can you get a guarantee for your money?

 There are many other benefits associated with investing in insured municipal bonds aside from the guaranteed interest and principal payments.  Most insured municipal bonds are also tax-free, as the government wants to encourage investors to put their money in municipal projects.  And by doing so, you can enjoy an interest yield that is free from federal tax burdens.  Some insured municipal bonds also come with state tax advantages as well.

 Insured Municipal Bonds vs. Regular Bonds

Though bonds in general are a safer investment vehicle than equities, they still come with certain risks, and an investor could lose money if a bond issuer fails to remain solvent and make scheduled interest payments.

However, an insured municipal bond comes with the highest rating from the major rating agencies.  Insured municipal bonds are very low risk and conservative for any investor.  Additionally, the low risk and insured aspect makes an insured municipal bond more liquid than most bonds on the market.  This can be especially pleasing to investors who want to remain liquid in a volatile economic and investment market.

 Additionally, insured municipal bonds offer a higher yield than other non-insured municipal bonds.  Since the insured municipal bond comes with a higher rating are scrutinized more, the yield is generally a little better.

 Where to Buy Insured Municipal Bonds

If you have decided to invest in the safe yield of insured municipal bonds, most brokerage houses deal with these types of instruments.  Contact your investment broker to find out how to add the right insured municipal bonds to your portfolio.

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.