Cost of Bonds

When a bond is issued, the issuer is usually trying to raise a large sum of money to fund a project or to fill gaps in cash flow. Such projects are typically massive in size; the building of a hospital, the construction of a bridge, etc. Hundreds of millions of dollars may go into the cost of such projects, and this cost is reflected in the specific municipal bond that is issued for it.

Example of How a Bond is Priced

For example, let’s say the City of New York wants to construct a bridge at the cost of $200 million. They have funds totalling $100 million already set aside for construction and miscellaneous costs. In order to raise the other $100 million, they decide to issue a municipal bond. Municipal bonds are generally issued in blocks of $1,000 and $5,000. In order to raise the required $100 million for the bridge, the City of New York would have to sell 100,000 bonds at $1,000 each or 20,000 at $5,000 each.

Other municipal securities such as commercial paper and short and long-term notes may be sold at a significantly lower price. You may remember when you turned 18, that there was an increase in the money you had to your name - likely because your grandmother purchased a bond for you when you were born, and it matured when you tuned 18. These bonds can be bought in smaller blocks - $25, $50, and $100 denominations. Large issuers have attempted to sell their municipal bonds in smaller denominations to attract more lower and medium-income investors, but they have done so with little success.