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. How do the returns on municipal bonds compare to those of other bonds?

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  2. What do cities do with the funds generated from municipal bonds?

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  3. How are municipal bonds taxed?

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  4. How a bond's face value differs from its price

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  5. Can Mutual Funds Only Hold Bonds?

    Find out which mutual funds include only bonds in their portfolios. Learn why some funds invest in different types of bonds ... Read Answer >>
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  1. Triple-Tax-Free

    An investment (usually a municipal bond) featuring interest payments ...
  2. Double Barreled

    A double barreled bond is a municipal bond in which the interest ...
  3. Net Debt To Assessed Valuation

    In a municipal bond issue, a ratio measuring the value of the ...
  4. Bond

    A bond is a fixed income investment in which an investor loans ...
  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 ...
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