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.

  1. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>
  2. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  3. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>
  4. How stable are municipal bonds?

    Stability is relative in the municipal bond market. Municipal bonds tend to be safer than many other types of investments, ... Read Full Answer >>
  5. What does it signify if the term structure of an interest rate's curve is positive?

    When the term structure of interest rates is positive, it is a signal to economists the short-term yields on similar bonds ... Read Full Answer >>
  6. What do cities do with the funds generated from municipal bonds?

    Funds generated from the sale of municipal bonds may go to provide for unspecified, general government financial needs, or ... Read Full Answer >>
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