A triple tax-free municipal bond is just like any corporate bond. It is a debt instrument representing a loan given to a government authority or municipality to help it meet certain financial objectives or fund community projects.
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 when it matures.
Why Are Municipal Bonds Called Triple Tax-Free?
Municipal bonds are called "triple tax-free" because the interest payments are generally not subject to federal taxes. Interest payments may also be exempt from state and local taxes if bond is issued where the investor resides, thus making the bond 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 lower risk means municipal bonds typically pay a lower interest rate than certain corporate bonds.
Trading at a Discount or Premium
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 creates an additional gain.
Meanwhile, 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.