I should preface this with letting you know that bonds are debt instruments. When you buy a bond–both corporate and muni, you are lending the company or government entity money in return for interest (also called coupon or yield) and repayment of the purchase price upon maturity.

When you buy a corporate bond, you are loaning money to a corporation in return for interest paid on the bond amount and repayment of the bond at maturity.

Interest on corporate bonds is generally higher than on municipal bonds, the interest is taxable unless purchased in an IRA or other permissible retirement account, and the loan works toward funding growth and projects of the company.

When you buy a municipal bond, you are still loaning money for interest and repayment at maturity, but you are funding a government or municipal project. You will generally enjoy a lower interest rate and the interest, if you buy a municipal bond in your state, will not be taxed.

In order to determine which is best for you, you need to know what you will be taxed on the corporate bond interest. If you are taxed enough, you could end up making out better with a lower interest but non-taxable local muni.

Muni bonds are more advantageous when bought in a regular brokerage account than in a retirement account because you don’t get any real tax advantage when buying them in a tax-deferred retirement account because…well…you don’t pay taxes on the interest anyway.

Both muni’s and corporate bonds may be subject to capital gains tax when sold for a premium. What does that mean? I’ll tell you next time.

Later,

Yo