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Why Does A Public Bond Offer You More?

By Edited Oct 2, 2016 0 0

If you're looking to make a good high-yield, low-risk investment, a public bond is the way to go. Also called "agency bonds," a public bond is one from an agency backed by the US government. This agency wants to get low cost financing by borrowing, and although it's not the US government (as is the case with federal bonds), they are backed by the government. These are flexible bonds that offer you lots of benefits, and they can even give you a return in the form of interest.

Where Do You Get A Public Bond?

A public bond comes from a government agency or a government-sponsored organization. Many of them are issued by Fannie Mae (the Federal National Mortgage Association), Ginnie Mae (the Government National Mortgage Association), Sallie Mae (the Student Loan Marketing Association) and similar organizations. Funds are used for public projects, like farm loans, home loans and public projects. These bonds are considered to be a very high quality type of debt. Let's see what advantages they have to offer.

- Keep It From The Taxman

Many of these bonds are exempt from state and local taxes. They usually have a high minimum ($10,000 or more), so this is a great way to stash money and keep it out of the hands of state and local tax agencies. While you're helping to support their sponsored projects, they give you the benefit of not having to pay taxes on these funds.

- A Great Liquid Investment

A public bond is considered a "liquid investment." This means that it can be easily bought or sold. You can sell them early if you need the money, and because this is such a good debt, many organizations will buy them. You can sell them to banks and credit unions because they consider them a very low risk. Sometimes, you can sell them to insurance companies, universities, hospitals and other foundations.

- Safety And Peace Of Mind

These are considered some of the safest investments you can make. Your public bond is low risk and high liquidity, like a treasury bond. Although, unlike a treasury bond, it is not guaranteed to be backed by the government in case of default, it is highly unlikely that they'd let it come to that. For example, in September of 2008, the fed saved Freddie Mac and Fannie Mac during hard economic times. What this means is that, while it's not fully backed by the federal government, a public bond is very unlikely to default and leave you in the lurch. Actually, the slightly added risk that this gives a public bond makes it a potentially higher yield investment.

- Lots Of Flexibility

These bonds come in all shapes and sizes, with a variety of different structures to accommodate your tastes. For example, some are very short term while others have long-term maturities that can last for years. They also offer a "step-up" bond where the coupon rate increases when it's outstanding.

- Helping Out In The Community

One more advantage to buying a public bond is that you're doing a service to the community. Your money is making some kind of public works happen, and that has benefits for lots of people other than just yourself. It feels good to know that you're contributing to something more than just increasing your own wealth.

A public bond has lots to offer, from its flexibility and liquidity to its security and potential for a high yield. If it sounds good to you, start looking for a place to invest your money now.


4 Reasons Why A Public Bond Is An Excellent Investment

A public bond (also called an agency bond) is a low-risk and high yield investment. Like a treasury bond, it's money that you lend for a stated period; when it matures, you get the money back with interest. Unlike a treasury bond, which is loaned to the federal government, a public bond is loaned to an agency backed by the government. They're borrowing money to fund public works like student loans, home loans or farm loans. A public bond is an excellent investment for 4 key reasons.

1. It Is Absolutely Low Risk

The great advantage of treasury bonds over others is that there is no risk of it defaulting, since it's loaned to the US government. A public bond is also extremely low risk. Unlike treasury bonds, there is some possibility of the agency defaulting, but this is so extremely low that it's really not much of an issue.

To illustrate just how low this risk is, consider the case of Fannie Mae and Freddie Mac in September 2008. Both agencies had issued public bonds but were struggling due to bad economic times. Rather than defaulting and letting down their investors, the federal government stepped in and saved them, making sure the bonds could be repaid. Although these bonds are not technically fully backed by the government, this case shows that they are very safe.

2. It Offers Great Liquidity

These bonds are also wonderful because of their liquidity. "Liquidity" means the ease with which you can buy or sell a bond. Some bonds are difficult to sell, meaning that you're stuck with them until the maturity date, even if you'd rather have the money back. A public bond is considered an ideal debt because it has great liquidity.

If you want to sell your public bond before its maturity date, there are lots of options. Banks and credit unions won't touch any investment that's considered high risk, but they'll often buy these bonds. You can also sell a public bond to a university, hospital, foundation or insurance company. The high liquidity makes these investments very flexible.

3. It's Tax-Free

By far, the greatest advantage to this type of bonds is the fact that they are tax free at a state and local level. Because you're helping to fund public works that will benefit the community, the money you put into your public bond is tax free for the duration. This is your state or local municipality saying "thank you" for the help. Your money is going a lot further for them through the public bond than it would directly through taxes.

4. A Benefit To The Community

Finally, your investment in a public bond helps people. You're loaning your money for a good cause that will bring great benefit to your community. It's nice to feel like your wealth is helping others and contributing where it's needed.

In the financial investment world, a public bond is considered a "good debt." This investment can bring great rewards even though it carries little risk, and that's what makes an ideal investment.

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