To learn more about secured and unsecured bonds click here. The interest income on some bonds is either free of federal tax or can be deferred from tax until the bond matures. This feature makes them popular as bond investments. Although the interest income is tax-free, you will have to pay tax on any capital gains when you sell a municipal bond. If a municipal bond is issued at a discount, however, the difference between the discount and the face value is considered interest income.
Some bonds have a tax-deferral option.
These bonds are sold at discounts. As they move toward maturity, the bondholder can pay taxes on the yearly increases in their value. However, the investor can defer paying income tax until the bonds mature. Besides returning the principal, most bonds guarantee payment of interest at a specified rate. The yield refers to the rate the bondholder receives as a percentage of the investment.