What Is a Triple Tax-Free Bond?

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What Is a Triple Tax-Free Bond?

A triple tax-free municipal bond is the same as any other corporate bond. It is a debt instrument that represents a loan made to a government body or municipality to assist it in meeting specified financial goals or funding community initiatives.

The principle (also known as par) is paid back at maturity, as with any bond, and interest payments are made between the time the bond is acquired and when it expires.

Why Are Municipal Bonds Called Triple Tax-Free?

Municipal bonds are referred to be “triple tax-free” since the interest payments are normally exempt from federal taxes. If the bond is issued in the state where the investor lives, the interest payments may also be excluded from state and local taxes, making the bond triple tax-free.

Municipal bonds are low risk since the issuer and its power to collect taxes and utility fees back them up. Municipal bonds often pay lower interest rates than corporate bonds due to their lesser risk.

Trading at a Discount or Premium

Municipal bonds are issued at face value but may occasionally be exchanged for less. This is known as “trading at a loss.” When an investor purchases a municipal bond at a discount, they not only receive money from the coupon or interest payments, but they also win money when the whole principle is paid off.

Meanwhile, bonds acquired for more than par are said to be purchased “at a premium.” Bonds having interest rates greater than the market rate may be offered at a premium.

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