Double Tax Free Municipal Bonds are commonly used for investment purposes. They are very attractive among investors due to the exemption in taxes on profit.
These Bonds are issued by the state and local government sectors. Basic purpose of these bonds is to generate instant revenue or capital for major government projects. Since most of the municipal bonds are free from federal income taxes or have lower interest rate, it gets easier for the state to sell bonds and in return gather money.
Double tax free municipal bonds are the bonds that have an exemption from both federal government income taxes as well as from state taxes. The exemption in state tax is only acceptable if the person who’s been issued these bonds is the resident of that state. Otherwise state taxes are implemented.
Mainly there are two types of municipal bonds.
General obligation bonds: General obligation bonds provide funds to the government or state for the improvement of entire community. They are different from revenue bonds in a way that they provide guaranteed payments to the bondholder.
To achieve this guarantee, the issuer or the municipality utilizes its maximum efforts and has the flexibility to raise more funds through credit. In other words these bonds are repaid from a variety of tax sources. So, they are the most secure form of bonds, but provide the lowest interest rates.
Revenue bonds: Revenue bonds, also termed as state bonds, are utilized to finance projects that serve specific community.
The repaying process of revenue bonds in the form of interest, is initiated from the profits of income generating projects. For example a toll bridge, Hospitals, highways or some other facilities provided to the public.
Double tax free municipal bond rates are issued on short term or long term basis. The issuer receives cash payment from the bond holder and promises to repay that payment within certain period of time. That period of repayment can be as short as from few months to 10, 20 or 30 years or even more years. The minimum investment required for these bonds is $5000 or multiple of $5000.
Municipal bonds can be purchased from the issuer, termed as the primary market at the time of issuance or can purchased from other bond holders commonly known as secondary market.
The investment, whether in the form of municipal bonds or any other side, contains some risk factors. So if you plan to invest in municipal bonds, make sure that these bonds have better rating.
Make a thorough research before buying and check the economic stability and growth rate of the state which is issuing the double tax free municipal bonds. If any one of the factors is weak, then the process of repayment is risky. So any initial effort can save your time and effort and is quite beneficial.
