Closed-End Municipal Bond Funds

Closed-End Municipal Bond Funds

Closed-ended tax-free municipal bonds funds are generally composed of pools of municipal bonds and produce income that is exempt from federal tax, and exempt at the state and local tax levels to residents of the issuing state of the underlying bonds.

Closed-ended tax-free municipal bonds funds are generally composed of pools of municipal bonds and produce income that is exempt from federal tax, and exempt at the state and local tax levels to residents of the issuing state of the underlying bonds.

Unlike open-ended municipal bond funds which are 2a-7 funds invested in short term securities and designed to maintain a net asset value (NAV) of 1, these funds are like other closed-ended bond funds and have a defined pool of assets and a defined net asset value and can often trade above or below that value due to supply and demand of the fund shares.

When the shares of a closed-ended fund are trading at a price above the net asset value of the fund, it is said to be trading at a premium. When the shares are trading below the net asset value of the fund, they are trading at a discount. Discounts and premiums are set by the marketplace for closed-ended funds. Since net asset value is a function not only of the value of the holdings, but also management fees and costs for running the funds, most closed-ended funds trade at a discount to net asset value.

In uncertain times, these funds can actually have much more volatility than the underlying municipal bonds that they hold. Most funds invested in NJ, PA, CA and NY municipal bonds are currently trade at significant discounts to NAV.

Nuveen, Pimco, Morgan Stanley, Neuberger Berman and Eaton Vance all offer closed-ended municipal bond funds.

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: BestCashCow's Editorial Board has been led by Ari Socolow since 2008.

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