Mini bonds help non-profit organizations in areas where funding may not be available, providing immediate funding for projects and initiatives that may not otherwise be possible. These bonds are offered by local, state or federal governmental agencies. Many agencies look to offer tax exempt incentives in order to make these bonds an attractive investment. Mini bonds are helpful to non profit organizations due to their different uses, whether it be a capital appreciation bonds that is issued at a discounted value or using an interest bearing bond.
Mini Bonds and Their Use
Generally, mini bonds act like municipal bonds in that they are sold on a local basis and only offer tax benefits to residents where the non-profit is located. Many organizations may question how safe these bonds are. Since a government agency or a government underwrites the bonds, they are more reliable because they are backed by the full faith and credit of the taxing authority who issues them. As a result of the government underwriting these bonds, they are considered secure because there is an agreement devised between the seller and the purchaser. These bonds are typically used as a way to finance loans for non-profit organizations.
A capital appreciation mini bond is sometimes referred to as a zero-coupon bond because it is issued at a discounted rate or less than its par value, but it still appreciates to its full amount when reaching maturity. Basically, the bond is purchased at a fraction of its cost and can be cashed in when it has matured for the full value. An example of this is when it’s sold for $900 and matures 10 years later at $1,000. This means it would be issued at a 90 percent discount to its par value. As a result, the investor receives an income of $10 per year or $100 at maturity, which is the distinguishing factor between the purchasing price and the price at maturity.
When purchasing an interest bearing mini bond, the investor will receive their interest payment twice a year, based on the stated coupon interest rate of the bond. These interest payments take place until full maturation of the bond. The interest rate is decided based on a percentage of the bonds value. When researching mini bonds, it is also important to know interest bearing bonds cost more in comparison to capital appreciation bonds.
In essence, mini bonds provide an opportunity for non-profit organizations to borrow money at a lower rate in order to provide essential support services to a community in need of different services. In addition to helping the community, the investors have the ability to take advantage of these bonds through the different tax benefits. A local government agency can provide specific information about mini bond offerings in a particular area or community if you are interested or work for a non-profit organization. Bonds issued by state and government agencies are also often tax exempt on a state and federal level, lessening the cost of repayment by the agency.