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Here’s Why Now Is the Best Time to Buy Freedom Bonds

Here’s Why Now Is the Best Time to Buy Freedom Bonds

Judging by the looks of it, the BP oil disaster (aka Deepwater Oil Spill), despite causing the destruction it did, doesn’t really have anything special about it. After all, it is neither the first nor the last oil spill in the US, and neither is it the largest or the worst by any measure – that spot goes to the Greenpoint Oil Spill, in which over 250 million gallons of oil and refined product was leaked into aquifers under the streets of Los Angeles by Chevron refinery leaked for quite a few decades until its discovery in the late 1970s. It has been estimated that cleaning the mess made by this oil spill will take another half a century to clean up.

However, if we take a closer look, these oil spills collectively cause – and cost – much more than one can imagine. Not to mention the unhealthy “addiction” we have when it comes to keeping the commodity under our control – as the future generations in smog-filled cities as losing up to 1% of their vital lung function annually and weather patterns all over the planet are getting altered by leaps and bounds, we’re waging trillion dollar wars in Iraq as an “exercise” to control more oil, leaving tar sands exposed in Canada, consuming much more energy to extract than deliver in fuel to our tanks, and over and above everything – not being bothered about finding ways of generating energy other than burning the earth’s limited fossilized remains.

From the looks of it, it seems like an endless situation where there’s nothing we can really do. But then, WE CAN.

Believe it or not, we do possess the power of relegate all these “current” events right to the past and let them be a part of the history books. And we can do that by harnessing the power of an idea that was once very instrumental in saving the world.

Back in World War II, Patriotic Americans in thousands had bought war bonds in order to finance the path to victory and end the global tyranny that was the Axis. Why not re-use this marvelous tool again, rechristen them (as “Freedom Bonds” and put an end to this new form of global tyranny that currently exists in our lives?

The logic behind Freedom Bonds is to have the Treasury issue “revenue bonds” and subsequently use the funds collected to build a series of compressed natural gas (CNG) and Hydrogen fueling stations, and electric car charging stations, as well as support infrastructure for utilities and companies and utilities to provide those clean transportation fuels to consumers. That’s not all the bonds can do though – these bonds can help pay for those who are willing to convert their existing gas/diesel vehicle to hydrogen or CNG (just about any bus, truck or car that runs on the road these days can be converted to run on them) and fund American automakers who want to re-tool their assembly lines and make newer, more eco-friendly models which run on cleaner alternatives. They can even be used to finance a variety of fleets of widely-used vehicles such as school buses, government fleets, municipal bus lines, and trash trucks, which have been converted to a more eco-friendly version.

Note, however, that these are “revenue bonds” – marvelous as this plan is, we have no intention on spending even a single taxpayer’s hard-earned dollar directly on them. We plan to “repay as we go,” by repaying the bonds with generous interest, from normal fuel surcharges added to the cost of each fuel. In order to kickstart this system, however, we do need a bond financing mechanism, as the early revenues will be low in comparison to the upfront costs (which will initially be significantly higher). With time and progress, however, these bonds will be repaid in full (with interest) by the future users of vehicles which run on cleaner and greener fuels.

All said and done, we don’t consider using the special T-bills to curb our oil-obsession and tragic spills as the most patriotic part of our plan – that is yet to come.

In addition to the aforementioned, all, i.e. 100% of the billions of dollars that will be used to fund Freedom Bonds will be entirely spent on improving the American job sector. By using the bonds to pay mechanics to convert vehicles, build clean fueling infrastructure, help premier car manufacturers make 21st Century trucks and cars, we will set into motion a one-of-a-kind series of investments which will reap benefits for years to come. Freedom bonds will help create and maintain full-time, permanent and secure jobs which will help America help itself and the rest of the world create innovative technologies which will go on to (positively) change the world and the way we see it.

Believe it or not, every single one of us, at some point or the other, looks at the sordid picture of the Gulf and longs to do something that can change the situation, only to realize that we, as common people are powerless. We know that the available oil is bound to run out soon, despite all the efforts being put in by governments and oil companies to acquire the next barrel for themselves.

Not anymore. Buy buying Freedom Bonds, we can help those in need by making a sound investment that will make this problem the last of its kind. Which makes this – here and now – the best time to buy them.

YOUR GUIDE TO THE 7 DIFFERENT TYPES OF BONDS

YOUR GUIDE TO THE 7 DIFFERENT TYPES OF BONDS

Any bond’s instrumental characteristic – which authenticates it and distinguishes it from any other – is the entity that has issued it, since as an investor you’re counting on that issuer to have your hard-earned money returned to you.

The following are the most commonly-used types of bonds:

– Investment-grade corporate bonds (high quality)

– Higher yielding corporate bonds (poor), referred to as “junk bonds”

– Bonds that are backed by a mortgage

– Foreign bonds

– Municipal bonds

– Treasury bonds

– Other U.S. government bonds

Investment-grade corporate bonds

Carrying ratings that are at least triple-B from Moody’s Investors Service, Standard & Poor’s – or both (For the ignorant: ratings go with triple-A being the highest, followed by Double-A, Single-A, Triple-B and so forth), investment-grade corporate bonds are issued by financing institutions or companies which have stronger balance sheets.

Although the risk of such bonds defaulting is considered very remote, their yields still score much higher than both agency and Treasury bonds, despite the fact that they are fully taxable – like most other agencies. These bonds, however, tend to underperform Treasuries and agencies during times of economic downturns.

High-yield bonds

Generally carrying ratings below triple-B, high-yield bonds are issued by financing institutions or companies which have weaker balance sheets. The prices of these bonds are directly related to the health of corporate balance sheets. These bonds tend to track stock prices more closely than their investment-grade counterparts. According to Steve Ward, Chief Investment Officer of Charles Schwab Corporation, high-yield bonds do not provide the kind of asset-allocation benefits that come with mixing high-grade stocks and bonds.

Mortgage-backed bonds

These bonds have a higher face value as opposed to other bonds ($25,000 for such as opposed to $1,000-$5,000 for others). They do, however, suffer from what is called “prepayment risk.” The value of such bonds drop as mortgage prepayments rise to a higher rate – which is why they do not reap rewards from declining interest the way other bonds do.

Foreign bonds

A rather complicated kind of bond, foreign bonds are of different types. While there are some which are dollar-denominated, most foreign bond funds have approximately 1/3rd of their assets in foreign-currency-denominated debt (Source: Lipper).
For foreign bonds that are denominated by foreign currency, the issuing party makes a promise to pay in fixed interest — and thereafter return the principal amount in a different currency. The size of said payments once they get converted into dollars depends on the prevalent rates of exchange. For instance, if the dollar proves to be stronger than the foreign currency, foreign interest payments get converted into smaller dollar amounts (and vice versa).

The performance of a foreign bond fund depends more on exchange rates than on interest rates.

Municipal bonds

Popularly known as “munis,” municipal bonds are issued by U.S. states and local governments and their sub-agencies. They are available in investment-grade as well as in high-yield varieties. Although interest for such bonds is indeed tax-free, it does not automatically translate to be being beneficial for everyone. This is due to the fact that taxable yields end up being higher as compared to muni yields in order to compensate investors for the taxes.

Treasury bonds

Backed fully by taxing authorities, treasury bonds are issued by the federal government in order to finance the budget deficits. Due to having Uncle Sam’s full and official approval, such bonds are regarded as credit-risk free. They do have a critical downside, however, which is the fact that their yields tend to be the second lowest – just above tax-free munis.

However, they tend to outperform higher-yielding bonds during economic downturns, not to mention the fact that the interest on them is exempt from certain state income taxes.

Other U.S. government bonds

Alternatively known as agency bonds, these are normally supplied by federal agencies such as mainly Ginnie Mae (the Government National Mortgage Association) and Fannie Mae (FNM) (the Federal National Mortgage Association). Differing significantly from the mortgage-backed securities that are issued by the same agencies, as well as by Freddie Mac (FRE) (the Federal Home Loan Mortgage Corp.), the yield coming from such bonds are significantly higher than their Treasury counterparts. While they don’t have the full approval of the U.S. government at large, the credit risk for these bonds is considered minimal-to-none. Interest on such bonds is taxable at state as well as federal levels.

Advantages and Disadvantages of Muni Bonds

Advantages and Disadvantages of Muni Bonds

Generally speaking, bonds which don’t require too much investment (such as municipal bonds) are ideal for investors. That said, every investor and their portfolio have different kinds and combination of requirements. As an investor, you must consider all the advantages and disadvantages of municipal bonds in order to judge their appropriateness for your portfolio.

The following are the key advantages of municipal bonds:

Interest gained from Municipal bonds is mostly exempt from federal, state and even local income taxes:

Generally, an investor’s marginal tax bracket is the instrumental factor in deciding whether or not to invest in municipal bonds.

As an investor, it is always a good practice to first compare the yield of a muni bond with any comparable taxable bond’s after-tax yield. In order to do so, you must calculate the taxable equivalent yield of the muni bond. And in the event that the municipal bond you plan to invest in is not issued in the state of your residence, you should make the requisite calculation by equaling the taxable equivalent yield with the tax-exempt interest rate divided by one minus the marginal tax bracket. For example, if you are planning to invest in a municipal bond that has a yield of 4.5%, and your tax bracket is 25%, the taxable equivalent yield will end up being 6.0% (obtained by dividing 4.5% with 1 and then subtracting 25% from the same).

Municipal Bonds are available in a variety of choices:

Given that there are over 1.5 million outstanding issues of municipal bonds, one can easily determine the fact that bonds with all sorts of characteristics and combinations are available for investors to choose from.

Municipal bonds have high credit ratings in general:

While there are very few cases of municipal bonds defaulting, it is not entirely unheard of. As an investor, therefore, you must take the time to carefully review the credit quality before you go ahead and invest. In such situations, sticking with investment grade ratings is a good idea, since it indicates that the issuer is financially stable and therefore is unlikely to default.

As is the case with every type of bond, muni bonds too have some key disadvantages:

They cannot work with every portfolio-type:

Generally speaking, munis are not ideal for tax-advantaged plans such as 401(k) and individual retirement accounts (IRAs). This is due to the fact that municipal bond interest is exempt from federal income taxes, which means that you as an investor won’t gain anything by placing the bond in a tax-advantaged medium. On the contrary, the interest income, when withdrawn will be subjected to normal income taxes.

Municipal bonds can be redeemed even before they mature:

Having call provisions gives the issuer the power to redeem muni bonds before they mature. That said, the precise provisions vary from one type of muni bond to the other.

As an investor, you should review the provisions very thoroughly before you purchase a bond. Although doing so won’t allow you to stop an issuer if and/or when they make a call provision, it does allow you to purchase bonds with call provisions that are the best for you.

Usually, early redemptions occur when the market interest rates are lower than the interest rate of the bond. While you will the principal and maybe even a premium, the money will have to be reinvested later during a time when the interest rates are lower than what is paid on the original bonds.

Muni bonds remain subject to select taxes:

Although muni bonds are usually exempt from federal (and sometimes even state and local) income taxes, selling the bond prematurely can – and does often result in taxable gains. Furthermore, some bonds pay interest income that is subject to the alternative minimum tax (AMT).

Additionally, one should also consider local and State taxes in the event that the muni bond has not been issued in the state of your residence.

When is the best time to cash-in those old savings bonds?

Are you one of the many people who are still holding on to their old Savings Notes (Freedom Shares), H or HH bonds, or E bonds? Maybe now is the time when you can actually do something with those. After all, those bonds no longer earn interest and perhaps are (or are on their way to) causing you tax problems. In fact, you’d be surprised to know that the United States Treasury Dept. says that there are current outstanding U.S. savings bonds that don’t earn interest are collectively worth over $12 billion!

Which brings us to the most important question – how can one know if their bonds belong to this category – and if it does, then what can be done about it?

The best way to find out is to check your old bonds. Originally known as E Bonds, these were issued by the federal government began since the mid-1930s. Issued in a variety of denominations, they were mostly bought by citizens at a 75 percent of face value discount. In simpler terms, an individual paid $75 to buy a $100 bond.

The federal government ceased issuance of E Bonds from June 1980 and replaced them with EE bonds. These bonds calculate the earned interest a bit differently from E bonds, with investors buying then at half of their face value and receiving interest from them bonds once they redeem the bonds.

The bonds keep earning interest till their ‘original maturity’ (i.e. the point when the original price paid for a particular bond and the accumulated interest equal the bond’s face value. Interest payments, however, can – and are extended automatically beyond that point (generally for a ten-year-period), till the time the bond reaches its ultimate maturity, after which it is unable to earn any interest.

This is often where things get difficult. Since actual final maturity dates often vary from bond-to-bond, so it can be confusing. Take as an example, the E bonds which were issued from May 1941. Originally matured as of November 1965, these bonds had 40 years till they reached final maturity. Today, almost all of them are no longer earning interest. Contrastingly, E bonds which were issued from December 1965 and reached original maturity by June 1980, have just 30 years till they reach final maturity. As of today, all E bonds that were issued until April 1975 no longer earn interest. As for EE Bonds – they too reach final maturity in 30 years from their original maturity. Given that none of them are older than July 1980, it is only a matter of a couple of years before they cease earning interest.

Savings Notes, also known as Freedom Shares, were all issued between May 1967 and October 1970, when the Vietnam War was at its height. Much like their Like E/EE counterparts, they were sold at a discount and the interest was deferred until redemption. They too had 30 years to reach final maturity do not earn interest any more.

H and HH bonds, however, are a bit different from the aforementioned. Bought by investors at face value, these bonds pay out interest semiannually and in cash. H Bonds were first issued by the government from June 1952 through January 1957. These reached final maturity in 29 years and 8 months. H bonds issued from January 1957 till the introduction of HH bonds in January reach final maturity in 30 years. As of today, H bonds issued till April 1975 no longer earn interest. That said, HH bonds, which were stopped by the government since August 2004, reach final maturity in just 20 years. Additionally, all HH bonds which are more than 20 years old must be cashed in order to retrieve the face value i.e. the original investment.

TAX IMPLICATIONS ON VARIOUS BONDS:

While there are no state and local taxes levied on savings bonds, one does have to pay federal taxes at the rate of ordinary income taxes.

H or HH bondholders, on the other hand, have to pay taxes on the interest that they receive annually; buyers need not pay when they redeem the last payment (which is actually a return of the principal amount).

With E and EE bonds and Savings Notes, however, bondholders will have to pay taxes on the accumulated interest either when they redeem them, or when the bonds reach final maturity (and have not been redeemed). Said interest income is taxable for the year of final maturity or redemption – whichever is applicable.

In case the bondholder ends up missing this particular time period, and have only recently realized that the E Bonds that they have at home matured years back, they will need to file an amended tax return and might also be subject paying interest and a late penalty. It is always advisable for people in this situation to speak to their financial or tax advisor first.