A:

At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a government authority or municipality in order to help it meet certain financial objectives or complete projects in the community.

As with any bond, the principal (also called par) is paid back at maturity and interest payments are made between the time the bond is purchased and the time that it matures. Municipal bonds are called triple tax-free because the interest payments are not subject to federal taxes. When an investor purchases a municipal bond from a local authority in a state or city that he or she resides in, that interest is not subject to state or city taxes, thus making it triple tax-free.

Municipal bonds are low risk because they are backed by the issuer and its authority to collect taxes and utility fees. This low risk means that municipal bonds have a lower interest rate than certain corporate bonds.

Municipal bonds are issued at par but can sometimes be traded for less than par. This is called "trading at a discount." When an investor buys a municipal bond at a discount, not only do they earn money through the coupon or interest payments, but when the full principal is paid off, that will create an additional gain. Bonds that are purchased for more than par are purchased "at a premium." Bonds with a higher interest rate than the going rate might be sold at a premium.

RELATED FAQS

  1. What is the relationship between the current yield and risk?

    Discover the relationship between a bond’s current yield and risk, and how investors can use it to benefit their overall ...
  2. Who or what is backing municipal bonds?

    Learn about the basics of municipal bonds, including the various revenue sources that are utilized to back or secure municipal ...
  3. How stable are municipal bonds?

    Read about the safety and stability of the municipal bond market, and learn how that stability has been undermined since ...
  4. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ...
RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Treasury Yield

    The return on investment, expressed as a percentage, on the debt ...
  3. Series I Bond

    A non-marketable, interest-bearing U.S. government savings bond ...
  4. Safe Haven

    An investment that is expected to retain its value or even increase ...
  5. Bond Resolution

    1. A document used with government bonds, especially general ...
  6. Fully Taxable Equivalent Yield

    The yield on a municipal bond, when the effect of reduced taxes ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total Bond Market

  2. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily 20 Year ...

  3. Stock Analysis

    Top 5 Emerging Market Bond ETFs

  4. Mutual Funds & ETFs

    How To Short The U.S. Bond Market

  5. Mutual Funds & ETFs

    The EMAG Emerging Mkts Bond ETF: Worth ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!