Municipal Bonds vs. Corporate Bonds

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Corporate bonds or “corporates” are debt securities issued by public and private companies, usually in multiples of $1,000 or $5,000. 

 

A corporate bond is a loan or an IOU that a company promises to pay back at a specific time. The money loaned to the company is called the principal. During the time of the loan, the company pays the lender interest on the principal. This interest, which is usually paid twice per year, is taxable. The date the principal is due is known as the maturity date. Once the bond matures, the principal is returned to the lender. 

 

Companies issue corporate bonds to raise money in order to reinvest in or expand their business. A bond does not grant  ownership interest in the corporation.

 

Municipal bonds, or “munis,” are issued by cities or local governments such as school districts, counties, or public-owned agencies. Two types of municipal bonds exist: taxable and non taxable. Bonds that raise money for “the public good” are usually exempt from federal, state, and local taxes. However, bonds that raise money for private companies are usually not tax exempt. Bonds are generally certified as either tax exempt or non-exempt before they are issued.

 

The interest rate of a bond is based on the level of risk regarding whether or not the company will be likely to pay it back. A bond that is deemed more secure will generate a lower interest rate.

 

While they may pay out a lower interest rate, municipal bonds tend to have a higher yield on investment than do corporate bonds, because of their tax exemptions.

 

You can learn more about corporate bonds and municipal bonds on sites such as www.investinginbonds.com.  
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