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At Fleming Financial Services, Inc., our role is to assist our clients in defining and realizing their financial objectives and goals. We work with our clients to implement personalized plans designed for their unique situations. Our areas of concentration are: Retirement planning, Estate and Wealth Transfer strategies, and Business Continuation planning. We emphasize the importance of conducting our business with integrity and professionalism. As a member of PartnersFinancial, an independent national financial services company, we are able to provide access to sophisticated resources for the benefit of our clients. Some of the professionals with our firm are currently registered to conduct business through NFP Securities, Inc. With those additional resources in place, we help facilitate the complex corporate and personal financial decisions our clients must make.
Understanding Bond Yields and the Yield Curve-Part 3
Fleming Financial Services, PA, BondsAfter-tax yield It's also important to consider a bond's after-tax yield--the rate of return after taking into account taxes (if any) on the income received. A tax-exempt bond typically pays a lower interest rate than its taxable equivalent, but may have a higher after-tax yield, depending on your tax bracket and state tax laws. Example:  Bond A is a tax-exempt bond paying 4%; Bond B is a taxable bond paying 6%. For purposes of this illustration, let's say you're in the 35% federal tax bracket and pay no state taxes. Bond A's after-tax yield is 4%, but Bond B's yield is only 3.9% once taxes have been deducted. Bond A has a higher after-tax yield. Watching the yield curve Bond maturities and their yields are related. Typically, bonds with longer maturities pay higher yields. Why?  Because the longer a bondholder must wait for the bond's principal to be repaid, the greater the risk compared to an identical bond with a shorter maturity, and the more reward investors demand. On a chart that compares the yields of, say, Treasury securities with various maturities, you would typically see a line that slopes upward as maturities lengthen and yields increase. The greater the difference between short and long maturities, the steeper that slope. A steep yield curve often occurs when investors expect a faster-growth economy and rising interest rates; they want greater compensation for tying up their money for longer periods. A flat yield curve means that economic projections are relatively stable, so there is little difference between short and long maturities. Fleming Financial Services, PA,  Bonds Sometimes the yield curve can become inverted when short-term interest rates are higher than long-term rates. For example, in 2004 the Federal Reserve Board began increasing short-term rates, but long-term rates didn't rise as quickly. A yield curve that stays inverted for a period of time is believed to indicate that a recession is likely to occur soon. ©2013 Broadridge Investor Communication Solutions, Inc. All rights reserved.
Thomas Joseph
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