The Intricacies of State Bonds

Investing in state bonds is a unique form of investment that many investors are not aware of. These bonds offer investors with a number of benefits. Here are the basics of investing in state bonds and what it can provide for you as an investor.

State bonds are issued by individual state governments as a way to raise money for certain state projects. These bonds are sold to investors as a debt instrument. Those that purchased these bonds are technically lending money to the state for a certain amount of time. In return for the money, the investor is paid a certain amount of interest over the life of the bond. This is a fixed rate of interest and results in a fixed payment over the term for the investors.

Tax Implications

When investing in state bonds, one of the major incentives for investors is the fact that the interest received is tax-free. While this may not be the case for every bond, it is true for a majority of state bonds. Since the state is the one paying the interest, they do not require investors to pay taxes on the interest. This creates a very desirable situation for potential investors. When compared to other types of bonds, this tax incentive often puts state bonds in a more desirable position for investors. While other bonds might pay a slightly higher rate of interest, you will have to pay taxes on the interest that you earn. Therefore, the overall return of these other bonds is often less.

Safety

State bonds represent one of the safest forms of investment available in today's market. The state itself is obligated to repay the debt. Therefore, unless you believe the state is in danger of being dissolved, then your investment is safe. For many investors that have been burned by the stock market or other types of bonds, this represents a welcome change in risk levels for them. However, as a result of the lower risk, the returns that you could realize from this investment will also be lower.

Investing in State Bonds

In order to invest in state bonds, it typically takes a larger amount of investment capital to get started. For example, the lowest amount of money that you can typically invest in the state bond is about $5000. You may also have to open an account with a bond broker as opposed to traditional investment account. Therefore, this eliminates many potential investors because of the barriers that they have to overcome to get involved in the market. It takes more capital to get involved, and it pays a lower rate than many other forms of investment. This means that the state bond market is not for everyone. However, if you wish to lower your risk, take advantage of tax incentives, and have the money to invest, this could be a worthwhile investment.

blog comments powered by Disqus
Scottrade