| Show B ONS ON'S i TAX TAX EXEMPT EXEMPT BONDS Wellesley lulls Hills Mass Having recently completed their annual accounting with state and federal tax agencies Investors are most conscious of taxes and their effect on income The higher bracket taxpayer Is particularly aware of the tax bite and consequently consequent consequent- ly should seek out opportunities ties that will allow him to retain re reo tain tamn more of his investment income Some will look at oil ventures and cattle ranches which while providing high expense expense expense ex ex- pense deductions could prove to be too risky for most in vectors It is at this point that consideration should be given to tax-exempt tax municipal bonds Issued by cities towns and other local governmental bodies bodies bod bod- ies les- municipals provide the funds to carry out major munI mun- mun I ic inal nal projects One may also de in this group municipal municipal pal industrial development bonds issued to finance com com- merical ventures venturI's within a community community community com com- Income from such bonds has been exempt from federal income taxes and also in some Instances from income income in in- come taxes of the issuing state Hence they bear beat a coupon coupon coupon cou cou- pon rate lower than corporate issues Coupon R Rite Rate te vt vs Yield c cA A word about yield Prices I J ces for lor bonds are usually quoted quoted quoted quo- quo ted in terms of yield to maturity maturity ma ma- which is a reflection of coupon rate and the length I of time the bond has to run to maturity This also translates translates trans trans- lates into a dollar price for forthe forthe forthe the bonds Dollar price runs counter count r to yield yield yield-as as price declines declines de de- clines yield rises A bond priced below par will have a yield to maturity higher than its coupon Also if held to maturity a portion of the proceeds proceeds proceeds pro pro- could represent a capital capital cap cap- ital gain Recently the average average average aver aver- age corporate bond yield as expressed by Moodys Moody's averages es was 7 21 per cent cent- centOn On the same date the average yield on municipal bonds was 5 28 per cent This latter rate would in itself seem highly favorable tax favorable tax tax exempt But the advantage h is even greater for the higher higher bracket bracket er An investor in a 50 percent percent per per- cent bracket holding a municipal municipal municipal pal bond bearing a four per percept percept percept coupon receives the equivalent equivalent equi equi- valent of an eight per cent return on a taxable bond Selection With the great number of state and municipal subdivisions subdivisions in existence there Is obviously a wide choice of municipal bonds available However in selecting an issue we must look beyond the purpose purpose pur pose of the issue or even the yield While most municipal bodies probably will not default default de de- fault on their bonds this has happened A measure of the quality of a bond may be found in its rating usually tilting usually Moody's Moodys from Moodys from highest AAA to the seldom seen C C. C These ratings are essentially an evaluation evaluation eval of the issuing body based based bas bas- ed on a variety varlet of factors roughly comparable to an individuals individual's individuals individual's in in- credit rating As might be expected expect d the rated better issues Will command command com com- mand higher prices and produce produce produce pro pro- duce lower yields than those of 01 lesser quality This is also true of the bonds of a large well well known community as compared with those of a small community the bonds bends of the lesser known issuer will wilt be j less marketable especially in 10 sm small lU or odd lots In this situation sit situation it is possible for an investor in vestor vector to find himself forced to hold bonds to maturity because because be be- cause there is no ready market market mar mar- ket at realistic prices Tax exempt bond Investments investments Invest invest- ments perhaps more than other types of investment must be personalized But we offer as suggestions a few is issues issues issues is- is sues which look attractive to the Babson's Baboons Reports staff First is the Illinois Toll 4 3 of 1998 yielding 5 05 per cent to maturity Second is the Fairfax Fairfax Fairfax Fair Fair- fax County Virginia Water Authority of 2007 yielding 5 22 per cent Also we like the Austin Texas School District 4 90 per cent of 1991 yielding per cent |
