How to Buy Tax-Free AAA Bonds in Ohio
Tax-free bonds are essentially loans issued by investors to municipalities in exchange for a promise of repayment with interest. AAA-rated bonds are deemed to be the most creditworthy. Municipal bonds are free from federal taxation but are exempt from state taxes only if purchased by a resident of the state of issue. Thus, an Ohio resident who buys AAA-rated Ohio bonds receives completely tax-free interest from a financially strong issuer. Municipal bonds can be purchased from most financial services firms.
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Instructions
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Determine your investment objective. While all AAA-rated bonds are considered safe investments, they do have different characteristics. If income is your objective, you may want to buy the highest-yielding bonds, regardless of other risks. You also have the option of investing in issuers that you wish to support, such as a particular school district.
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Understand interest rate risk and inflation risk. While AAA bonds are generally secure in terms of their payments, all bonds carry interest rate and inflation risk. Interest rate risk is the risk of your bond declining in value as interest rates rise, and inflation risk is the risk that money you receive in the future is not worth as much as money you own currently.
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Choose a maturity date. Generally speaking, the longer the maturity date, the higher the rate of interest you will receive. However, longer-maturity bonds also carry higher levels of interest rate and inflation risk. You may want to choose a maturity date that coincides with an anticipated need for the money, such as when your children begin college.
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Evaluate the AAA rating. Bonds are rated by outside agencies on a scale where AAA is the highest rating. Most AAA bonds are insured by third-party services, such as MBIA, that guarantee interest and principal payments in the event the issuer defaults. If a bond is rated AAA on its own, without insurance, the underlying municipality is in an extremely strong financial position. Usually, bonds that are rated AAA without insurance pay a slightly higher interest rate in exchange for not having the safety net of insurance underneath.
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Contact your financial adviser. Ask him for the list of AAA-rated Ohio bonds in his firm's inventory, along with pricing and recommendations, based on your financial objectives.
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Review the list of available bonds. Find bonds that match you needs in terms of interest rates, maturity dates, type of issuer and insurance status.
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Compare and analyze bond prices. From the pool of available bonds that fit your requirements, choose the bond with the lowest price.
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Purchase the bond. If you are comfortable with the price your adviser quotes, enter your order at the designated price. If you want to pay a lower price, enter an order at the price you desire, known as a "limit" order. You may have wait hours, days or even longer before the bond price falls to your limit price and your order is executed.
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References
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