Many investors choose to purchase tax free bonds because of the multiple benefits that they can provide. Here is a look at tax free bonds and how they work.

Tax Free Bonds

These types of bonds are also referred to as municipal bonds. These bonds are issued by municipalities such as city governments, county governments, state governments, schools, and some airports. These bonds are issued as a way for these municipalities to raise money.

Private investors can purchase these bonds with the help of a bond dealer. In return for their investment, they are going to receive a regular interest payment from the municipality. Then, at the end of the bond term, they can receive the entire amount that they originally invested back.

The major benefit that you receive by investing in these bonds is that you do not have to pay federal taxes on the interest that you earn. Even though the interest rates are typically lower than what you can get from other types of bonds, this tax benefit makes them very attractive.

Purchasing the Bonds

In order to purchase these bonds, you typically have to start an account with a bond broker for at least $5000. This means that not everyone will be able to afford to get into this market.

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