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 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 ... Read Answer >>
  2. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  3. 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 ... Read Answer >>
  4. What is the difference between municipal bonds and standard money market funds?

    The primary difference between municipal bonds - also known as "munis" - and money market funds is that municipal bonds are ... Read Answer >>
  5. Why do zero coupon bonds tend to be volatile?

    Learn why the price of zero coupon bonds is volatile and why some investors may wish to hold them in retirement accounts ... Read Answer >>
Related Articles
  1. Financial Advisor

    How to Find the Best Bets in Muni Bonds

    Approach investing in municipal bonds the same as you would investing in stocks.
  2. Investing

    Consider These Municipal Bond ETFs

    Though relatively low-risk, there are still some factors to consider when taking the plunge into municipal bond ETFs.
  3. Financial Advisor

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  4. Investing

    Taxation Rules for Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  5. Investing

    Should You Consider Muni Bonds?

    Municipal bonds come in two types. General obligation bonds repay their holders through taxes. They often have low interest rates, but they’re safe.
  6. Investing

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
  7. Investing

    How Are Zero-Coupon Municipal Bonds Taxed?

    What every investor needs to know about taxes and zero-coupon muni bonds.
  8. Investing

    The Top 5 Municipal Bond ETFs for 2016

    Learn about exchange-traded funds that invest in municipal bonds issued by local U.S. municipalities with returns on bonds exempted from federal tax.
  9. Investing

    Muni Bond ETFs to Date 2016 Performance Review (MUB, XMPT)

    Learn how municipal bond exchange-traded funds have performed year-to-date in 2016, and which ones have performed the best and the worst so far.
  10. Investing

    Foreign Investors Flock to U.S. Municipal Bonds

    Interest in U.S. municipal bonds by foreign investors is on the rise. Here's why.
RELATED TERMS
  1. Dollar Price

    The percentage of par, or face value, at which a bond is quoted. ...
  2. Bond

    A debt investment in which an investor loans money to an entity ...
  3. Unlimited Tax Bond

    A municipal bond that is backed by the pledge of the issuer (generally ...
  4. Private Purpose Bond

    A type of municipal bond that is issued to finance a project ...
  5. Munifacts

    A newswire service for municipal bonds that provides information ...
  6. Municipal Bond Arbitrage

    A strategy that consists of building a portfolio of tax-exempt ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  3. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  4. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  5. Backward Integration

    A form of vertical integration that involves the purchase of suppliers. Companies will pursue backward integration when it ...
  6. Pari-passu

    A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations ...
Trading Center