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Saturday, February 26, 2005



Municipal Bonds

As defined by Ivestopedia a municipal bond is "A debt security issued by a state, municipality, or county, in order to finance its capital expenditures. Municipal bonds are exempt from federal taxes and from most state and local taxes, especially if you live in the state the bond is issued." What a deal, you may say. The issuer receives a cash payment, and in return promises to pay the investor that cash payment over a period of time (anywhere from a few months to 40 years). Laws governing municipal bonds usually require the money raised by a bond sale to be spent on one-time capital projects between 3 to 5 years. Due its tax exemption, a municipal bond typically returns a lower investment compared to a taxable investment of similar risk. Although the return is lower, due to its exemption an investor will still earn more money from the municipal bond rather than a taxable investment (a municipal bond returning 6.2% will return the equivalent interest income after taxes as a corporate bond returning 10%).


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