How Much Does a Municipal Bond Cost?

Video Transcript

"Hello, I'm Roger Groh. Did you ever wonder how much you would pay for a municipal bond? What's a municipal bond you might say. Well that's when your local state or city or county needs money because they traditionally have not done a good job of balancing their books and have spent much more money then they've brought in through tax revenue. In the old days, it used to be these bonds were issued in increments of 1,000 dollars so you can buy one bond for 1,000 dollars and then the value of it would go up and down depending upon the credit quality of the state or county or city that actually had issued it. So if you purchased a bond yesterday and today the state defaults in that bond, in fact the bond might fall to half or less of it's original value. That is happening in many of the states throughout the United States today because tax revenues have declined significantly producing large budget deficits that are not likely to be cured. In the state of the California, the biggest state and most profitable state, the budget deficit is expected to be 26 billion dollars over the next year. An enormous number and as a result, bond prices have gone down significantly. So today you could buy municipal bonds for significantly less than they were initially issued at. There's one other thought, traditionally all bonds do well when interest rates are going done. But today interest rates are about zero so they're not going to go any lower. As interest rates begin to go up, in all likelihood the value of bonds will fall. So it looks to us you could be hit with a double whammy. Increasing interest rates at some point in the future and decreasing credit quality of the state or of city or county in which you live. Be very, very careful, maybe use guaranteed bonds if you elect to do that and certainly have a long discussion with the stockbroker you trust who can explain to you the advantages and disadvantages of using munis."