What is a triple tax-free municipal bond?

By Yolander Prinzel AAA
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. How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return ...
  2. How long can I hold my HH/H Bonds and still earn interest?

    Take advantage of your bond investment and learn how long you can hold on to your Series H/HH Bonds and still earn interest ...
  3. How do I sign up for a TreasuryDirect account?

    Invest in Treasury securities by dealing directly with the U.S. Department of the Treasury online, conveniently managing ...
  4. What are the maturity terms for Treasury bonds?

    Learn how treasury bonds pay interest, when they reach maturity and the differences between terms for treasury bonds and ...
RELATED TERMS
  1. Treasury Yield

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

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

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

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

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

    The name given to a Federal Reserve monetary policy operation ...
Related Articles
  1. 10 Sources Of Nontaxable Income
    Taxes

    10 Sources Of Nontaxable Income

  2. Municipal Bond Tips For The Series 7 ...
    Insurance

    Municipal Bond Tips For The Series 7 ...

  3. Is It Finally Time For TIPS?
    Stock Analysis

    Is It Finally Time For TIPS?

  4. Time to Cash In Your U.S. Savings Bonds?
    Savings

    Time to Cash In Your U.S. Savings Bonds?

  5. A Look At National Debt And Government ...
    Bonds & Fixed Income

    A Look At National Debt And Government ...

Trading Center