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Not all bonds are tax-free but many are. Quite often cities that need money for projects get it by issuing municipal bonds. If you live in the same state as the issuing city, the bond may be free from state and federal taxes.
Investors who buy bonds (whether they're issued by companies, cities, states or Federal agencies) are, in effect, lending money to the issuer in exchange for regular interest payments - and the return of the original investment amount (principal) at maturity. The common elements of a bond are:
Face Value/Par Value — the amount of money paid at maturity. Normally bonds are issued in $1,000 denominations. So if you want $10,000 worth of bonds in your portfolio, you'd buy 10 of them.
Coupon Rate — the stated annual interest rate of a bond. The term "coupon" is a throw back to a time when bonds had coupons that the purchaser would clip off and mail in for each interest payment. These days it's all managed electronically.
Yield — the coupon rate divided by the price paid for the bond. If you buy at face value, the yield is the same as the coupon rate. But if you buy it for less than face value, the yield will be more than the coupon rate ¯ and vice versa.
AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.
