Taxation of zero coupon municipal bonds

taxation of zero coupon municipal bonds

When an investor purchases a bond that pays periodic interest, and the interest payment received is not needed to pay for an immediate expense, they must decide where to reinvest these payments. . The short- or long-term capital gain, or loss, on a bond sale is simply the difference between the selling price of the bond and the original purchase price of the bond. Credit rating agencies typically assign credit quality ratings of A or higher to zero coupon bonds. . For example, a bond that is used for a particular municipal improvement that is not backed by the credit of a state or municipality, but rather that of a corporation (such as an airline backing an airport improvement bond would be subject to AMT.

taxation of zero coupon municipal bonds

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If youre uncertain or questioning whether or not you made a good decision, you can ease your mind by purchasing insurance for the bond. Credit ratings, however, should not be the sole basis for any investment decision. The following is a breakdown of each type of debt. When that happens, the value of securities carrying a lower rate of interest will decline. . In terms of quality, zeros are only second to Treasury securities. . Income Taxes, a zero coupon bond that is free from federal income taxes provides investors in higher tax brackets with an even greater advantage relative to taxable securities. . Zero-Coupon Municipal Bonds and Taxes Zero-coupon municipal coupon bonds dont have to be taxed. Zero coupon municipal bonds offer a wide choice of bonds. Features, one of the reasons investors are interested in zero coupon bonds offered by municipalities is their favorable tax treatment. .