| Investing in the stock market is one of the hardest | | | | have explained this earlier! Stripped Munis are sort of |
| things that most people will ever do in their life. | | | | like legal pyramid schemes. Brokerage firms will buy up |
| Because of this, it seems like we're always looking for | | | | a bunch of regular municipal bonds, and instead of |
| better ways to make money investing. One of those | | | | selling these bonds to their investors, they hold onto |
| better ways to make money is by investing in stripped | | | | them and instead sell what we call stripped municipals |
| municipals. In this article I'm going to discuss stripped | | | | at varying maturities (which they invent out of thin air). |
| municipal bonds, what they are, and how you can | | | | The brokerage firm then uses the payments of the |
| profit from them. | | | | original bonds as they come due to pay off the |
| Stripped Munis are bonds that are particularly | | | | stripped bonds over time. Maybe calling them legal |
| attractive for people who are in a high tax bracket and | | | | pyramid schemes isn't quite correct, but you get the |
| who also know exactly when they need their money. | | | | idea. |
| Most of the time they come in maturities with less than | | | | The reason why brokerage firms do this is so that |
| one year, all the way up to 30 years which gives you | | | | they can basically convert the regular municipal bonds |
| quite a bit will leeway when making investment | | | | which have much longer maturities, into the stripped |
| decisions. This is quite unlike zero coupon municipals, | | | | Munis that have shorter maturities and since they are |
| which usually have much greater callable dates. | | | | able to stagger the original bond purchases they can |
| Stripped Munis are never callable which is also a huge | | | | be sure to have a steady stream of cash to pay off |
| benefit under the right circumstances. They don't pay | | | | the stripped bonds when they need to. |
| interest but instead are sold at a great discount to their | | | | So basically its a financially engineering vehicle that |
| face value. When the bonds finally become due, you | | | | allows you to reap the benefits of long-term bonds at |
| are paid the bonds full face value; and the difference | | | | a shorter term. There are many different stripped |
| between the discount price that you originally paid and | | | | municipals to choose from including ones backed by |
| the face value at maturity is the profit you will make. | | | | pre-funded bonds, ones backed by high quality triple-A |
| There is a significant risk involved in these types of | | | | general obligation bonds, and insured stripped |
| bonds because unlike other bonds, there are not often | | | | municipals. |
| large markets for them. That means generally | | | | Stripped munis give you a lot of flexibility and a lot of |
| speaking, that when you buy them you will usually | | | | options that regular municipal bonds can't offer you. |
| have to hold them until maturity, and you won't be able | | | | Because of this I like to recommend them to everyone |
| to sell them earlier in a secondary market, in most | | | | who asks. But like all investment decisions, be sure to |
| cases. This may not be such a big deal, especially if | | | | do your own research into these bonds before you |
| the maturities are not very far into the future. | | | | make any final decision. |
| But what the heck are these things? Yeah, I should | | | | |