Fixed Income Investments

First, an individual should determine how each return on an investment is taxed.  Second, they should subtract the tax from the pre-tax return to determine the after-tax return.  After determining this information, investors should compare the risk characteristics of each investment and decide if the difference in the return compensates them for the varying degrees of risk assumed.  The investment that is selected should be based on a trade-off between risk and return that is acceptable to them.

Here is an example of risk/return trade-off.  With a certificate of deposit (CD), the investment is FDIC-insured up to $250,000, the return is defined, and the invested capital is at a relatively low risk as long as the CD is held to maturity.  Since this vehicle is a lower-risk investment, it carries a lower after-tax return.

In an effort to make a correct estimate of after-tax returns on fixed income securities, it is important to consult your tax advisor.  He or she will help you determine the various ways in which returns on specific fixed income securities are treated for tax purposes on your particular federal and state tax returns.  Your tax advisor will also help you determine the marginal federal and state income tax rates that are applicable to your situation. 

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Municipal Bonds

Keeping more of the money they worked so hard for is important to most individuals.  For this reason, investing in vehicles that are exempt from federal taxes can be very attractive.  One of the very first tax-advantaged investments, municipal bonds, is still one of the most popular today.  Municipal bonds are debt obligations issued by states, cities, towns, or public commissions to provide money for schools, hospitals, and other public works.  These securities provide income that is free of federal and, in some cases, state and local taxes.  Although income generated by most municipal bonds is exempt from federal taxes, some taxable bonds do exist, and any capital gains earned from the sale of the bonds are subject to all federal and most state tax laws.  Certain issues may be subject to state and alternative minimum taxes as well.  Investors may choose from a variety of municipal bonds with varying maturities.

Municipal bonds may also be purchased as mutual funds.  By investing through a municipal bond fund versus purchasing individual bond issues, you may be able to benefit from both diversification and ongoing professional management of the fund.  Also, municipal bond funds pay monthly tax-free income, unlike the underlying bonds, which pay semi-annual or annual interest.


Investors should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing. The prospectus, which contains this and other important information, can be obtained by contacting your investment professional and should be read carefully before investing. The investment return and principal value of an investment will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Bonds and interest rate-sensitive securities are subject to interest rate risk, such that prices on existing bonds and securities will generally decline as interest rates rise. The return of principal in bond funds is not guaranteed. Bond funds have the same interest rate, inflation, and credit risks that are associated with the underlying bonds owned by the fund.
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Bond Investment Strategies

Investors can never be completely certain as to where yields on bonds are headed.  A popular way for investors to help balance risk and return in a bond portfolio is to utilize a technique called laddering.  To build a laddered portfolio, investors purchase a collection of bonds with different maturities spread out over their investment time frame.  By staggering maturities, investors may be able to reduce the impact that changes in interest rates can have on their portfolio.

For example, an individual who wishes to create a laddered portfolio could purchase bonds that mature each year during a span of ten years.  By using a rollover strategy as well, when the first bond matures, the investor could reinvest those funds in a bond that matures in ten years.  As each bond matures, the investor would continue this process.  After ten years, the investor would own all ten-year bonds, with one maturing every year.  By laddering the bond portfolio, an investor may worry less about fluctuations in interest rates.  If interest rates rise, the investor knows that he or she will soon have money available, from a maturing bond, to take advantage of a new bond.  If interest rates should fall, then the investor has at least managed to secure higher rates for a portion of their portfolio.  This strategy can also be used with CDs.


Bond laddering does not assure a profit or protect against loss.  Yields and market values of bonds will fluctuate, and if sold prior to maturity, may be worth more or less than the original investment.  Laddering is not the only strategy available to investors.

For further information on the laddering technique, and to determine if this strategy is right for you, contact your investment professional.