There are different types of bonds, but the two selected bonds to be discussed are the municipal bonds and treasury bonds. Municipal bonds are usually issued by the U.S states and the local governments or their agencies; these bonds come in both the investment-grade and high-yield diversities (Rösch & Scheule, 2016). Interests associated with bonds are tax-free; however, that does not imply that they can benefit everyone. On the other hand, treasury bonds are always issued by the federal government in order to finance its budget shortages. Since Uncle Sam's remarkable taxing authority always supports treasury bonds, they are recognized as credit-risk free. However, treasury bonds are associated with lower yields apart from the tax-free municipals. But during economic recessions, the treasury bonds perform better than the higher-yielding bonds; also the interest is exempt from the state income taxes.
Both types of bonds generate income for their investors through regular interest payments (Rösch & Scheule, 2016). The interest payments for the treasury bonds and municipal bonds are usually made twice yearly; however, for municipal bonds sometimes bonds can allow frequent or less frequent payments. Interest income which is obtained from treasury bonds twice a year is always a subject to the federal income taxes: although, treasury bonds are exempted from any potential state and local income taxes. Municipal bonds always have varying tax consequences or implications. The majority of municipal bonds are exempt from the federal taxes, also from the local taxes in the states where they are issued. However, some municipal bonds are taxable at the national level. Tax benefits associated with both municipal and treasury bonds increase their yields or productivity in comparison to other forms of bonds which do not give similar exemptions.
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Municipal bonds and treasury bonds give lower interest payments compared to other types of bonds such as the corporate bonds due to the tax advantages which the securities offer and their support by their federal providers, and this implies that issuers are not subjected to give higher rates to attract many investors. The treasury bonds do not have a risk of default since the federal government usually guarantees them. The municipal bonds are said to having a very low risk of default due to the ability of both state and local governments to escalate or raise taxes in order to cover their debts; however, they are not considered as risk-free as the treasury bonds.
References
Rösch, D., & Scheule, H. (2016). Systematic Credit Risk and Pricing for Fixed Income Instruments. The Journal Of Fixed Income . doi: 10.3905/jfi.2016.2016.1.046
