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Map of Paso Ollague/Ollague on After the 12th century, most western European serfs could convert their labor obligations to fixed money rents and become free villeins; this system of emancipation was not possible in eastern Europe, where there were few individual tenants, and here, serfdom persisted much longer. The so-called disintegration of the manor in western Europe was typically favored by both peasants and lords. Peasants achieved greater freedom, particularly from hated labor obligations, and lords were rewarded with a cash payment and freed from paternalistic obligation to their tenants. Although the terminology for describing the manorial system was derived from the European context and historians became increasingly ambivalent about its usefulness by the 1960s, Marc Bloch’s use of the word feudal to describe a particular type of society has been expanded to explain arrangements in other parts of the world in other chronological phases (especially Japan, China, India, Latin America and Africa) despite the opposition of specialists to the designation in these contexts. The arguments of Karl MARX regarding the historical stages of economic development made such usages common. For Marx, feudalism was an intermediate pre-requisite stage on the way to capitalism, in that the landlord did not completely control the means of production (as the capitalist later would), but could still appropriate the product. In this view, feudalism was challenged by the growth of trade and resulting markets for manufactured goods, which the feudal economy could not satisfy, both because seigneurs were primarily focused on political aims and not on standard-of-living issues, and because guild structure limited production to keep prices high. Map of Paso Ollague/Ollague 2016.

Political maps and economy of country;
Taxable and Nontaxable Bonds, and the Tax-Equivalent Yield

Some bonds are more taxed than others.

Depending on what type of bond you buy”Treasury, municipal, or corporate”and depending upon where you live and where the interest payments originate, your tax obligations to the federal government and your local tax agency can differ. In short, some bonds generate taxable income, some bonds generate partially taxable income, and with some bonds none of your income is taxed.

Corporate bonds suffer the greatest tax burden. Every penny of interest income you receive is taxed by state and federal governments, and generally at whatever ordinary-income-tax rate you pay. The one exception: If you own the bonds in a Roth IRA or a Roth 401(k). Any income or profits in these accounts accumulates tax-free and you can ultimately withdraw those funds tax-free.

Income generated by U.S. Treasury bonds is taxed at ordinary income rates by the federal government, but are exempt from city, state, and local taxes. Treasury bond, by the way, is a generic term encompassing three types of debt instruments: Treasury bills, which mature in one year or less; Treasury notes, which mature between two and ten years; and Treasury bonds, which mature beyond ten years, with the most famous being the thirty-year bond.

Municipal bonds, meanwhile, are generally tax-free, so you won’t pay taxes to any state or local agency or to the federal government. I say generally because, as with so many rules, this one has exceptions. The tax-free status of muni-bonds, as they’re typically called, generally only extends to the state you’re in. If you live in Virginia, as I do, the bonds issued by Virginian govern-I nents are exempt on Virginia income-tax returns. If you happen to earn income from muni-bonds issued by North Carolina or New York or wherever, that income is taxable in Virginia, though it remains tax-free on federal returns. Again, a caveat: Some states do not tax the income earned on other states’ bonds. Along with the District of Columbia, the munificent states include Alaska, Indiana, Nevada, South Dakota, Texas, Utah, Washington, and Wyoming. Caveat number two: Any capital gains you generate buying a muni-bond below par and selling at or above par is taxable as ordinary income.

This partial or fully tax-free status means you have yet another yield to calculate: the tax-equivalent yield.

If you think about the risk-and-rate relationship I’ve mentioned a couple of times, you likely recognize that corporate bonds are clearly riskier than Treasuries and high-grade municipal bonds

because governments ultimately have taxing authority to raise the capital required to repay their debt; corporations clearly don’t. Therefore, corporate bonds typically pay higher interest rates, even though the company might ultimately represent the same level of risk as some particular town or government agency.

Logic would insist that maybe it makes more sense to focus on high-grade corporate bonds, where your risk is relatively small and your returns are larger than you’d get with a similarly rated government bond.

Not necessarily so. The tax advantages enjoyed by Treasury and municipal bonds effectively sweetens their rate of return. Or, looked at another way, the taxes you’ll pay on the income from the corporate bond works to lower your overall rate of return. This is the tax-equivalent yield, the actual yield you’ll earn after taking into account any tax considerations. The higher your tax rate, the greater your tax-equivalent yield on Treasury bonds and particularly muni-bonds. For investors in high-tax jurisdictions such as New York, California, and New Jersey, local municipal bonds will often earn you greater after-tax returns than will corporate bonds with higher interest rates.

Consider this simple example, in which an investor puts money into a $1,000 bond and is subject to a federal tax rate of 35 percent and a state tax rate of 5 percent:

The municipal bond investor clearly wins out, even though the muni has a decisive interest-rate disadvantage. But taxes play such a defining role in how much of your income remains that they can swing the balance in favor of munis in some instances. Pay attention to that and you can earn fatter returns over time in your bond portfolio.Guaranteed Return

If the housing-market collapse of 2007 and the stock-market crash of late 2008 rekindled any memories, they were of the Great Depression. As the stock market shed thousands of points over just a few days, and as government officials raced to find solutions that would reverse the tide, the media were filled with stories about the similarities to and differences from the Crash of 1929 and the days of Depression that followed.

In such moments of panic, investors want guaranteed returns, an investment they know will never lose value, and one whose principal will always be there when needed. That desire, though, isn’t unique to times of economic disaster. Retirees leaving the workforce for the last time and looking ahead to twenty or more years in retirement ask the same question. Investors who listen to bankers and brokers pitch investment products they’re unfamiliar with ask the same question.

The hunt for guaranteed return, however, often conflicts with another key investor want: big returns.

Part of what created the housing collapse and the 2008 stock-market crash was investors”the big institutional players as well as Main Street investors”seeking bigger returns in the late 1990s and early 2000s than they could find in Treasuries and CDs and savings accounts. At a time when those investments were in some cases returning less than 1 percent annually, the prospect of buying a house with nothing down and a 5.75 percent interest rate and renting it out for annualized returns of

8 percent to 10 percent or more seemed brilliant. So, the rationale of the day held, “I won’t lose my principal. Besides, housing prices always go up. That’s guaranteed.” With little more due diligence than that, investors pulled money from whatever account they could to buy real estate, in some cases buying rental property in their IRA, a very risky maneuver, since an IRA limits the amount of money you can inject into it in a given year, possibly leaving you unable to afford repairs and other costs for which you don’t have enough money in the account.

Alas, bigger returns walk side by side with bigger risks. You simply cannot have one without the other. So any investor who goes in search of big returns that are guaranteed is on a fool’s errand. And any financial professional, or supposed financial professional, who promises you big returns that are guaranteed is a fool and should be avoided.

The financial world has but few truly guaranteed returns. I’ve mentioned two so far in this book: FDIC-insured bank accounts, such as savings, money-market accounts, and certificates of deposit; and Treasury bonds. With any of those, your principal is as rock solid as principal can possibly get.

Municipal bonds that are insured against default are close to guaranteed, but in the 2008 stocks-and-housing crisis several bond insurers struggled, leading many to question what might happen in a situation in which many municipalities default and put unexpectedly large strains on insurance agencies.

Annuities, too, would seem to fit the bill, particularly so-called immediate annuities that begin paying out to you almost immediately after you sign up. A highly rated insurer such as Northwestern Mutual has been around since 1857 and will arguably be around for many years more, giving it a longevity fully capable of living up to its obligations to you. Still, it is an insurer, and insurers have failed in the past. State guaranty associations pay claims in the event an insurer fails, but there are limits to that coverage and you may not recoup your original principal.

In short, if you unquestionably seek return of principal, not just a return on principal, then settle on bank accounts and Treasury bonds. You won’t lose a night’s sleep. Just accept the fact, though, that guaranteed returns are guaranteed to be small relative to all the other options around you.

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