Zero Coupon Municipal Bonds

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Some issuers will come out with bonds that do not pay interest. These are zero coupon muni bonds. They are issued at a deep discount and pay par at maturity. Basically, you are earning the discount difference and that is calculated to a yield to maturity.

Since no interest is paid, there is not reinvestment risk - but there si also no current income.

Zero coupon municipal securities are most attractive when interest rates are low, since coupon rates on existing bonds will be lower anyway and professional investors do not have to reinvest the proceeds into something lower.

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