Municipal Convertible

A zero-coupon municipal bond that can be converted into an interest-bearing bond under certain circumstances. The municiple convertible is a zero-coupon bond, and so is sold at a discount from its face value. The bondholder does not have to worry about paying tax on the appreciation, much like they would not pay tax on the interest of a regular municiple bond.

Also known as stepped tax-exempt appreciation on income realization securities (STAIRS). 



|||Because the securities bear no interest payments, they a much more volatile than traditional municiple bonds. Municiple convertibles fall in value much quicker as interest rates rise, and rise in value much quicker when rates fall. An investor may want to convert to an interest bearing bond if they want to reduce volatility, or lock in bond value (should they believe rates will rise in the future).