Pricing of Municipal Securities

With credit analysis and marketability covered, let's turn to how municipal bonds are actually quoted and priced. There are two quoting conventions, and understanding accrued interest is essential for settlement calculations.

Two Quoting Methods

Municipal bonds are quoted in one of two ways:

Method	How It Works	Typically Used For
Dollar price	Quoted as a percentage of par value	Term bonds
Yield/basis	Quoted as the bond's yield to maturity (YTM)	Serial bonds

Dollar Price Examples

A bond quoted at 98 has a dollar price of $980 per $1,000 face value (98% of par)
A bond quoted at 102 has a dollar price of $1,020 per $1,000 face value

Yield/Basis Quotation

When quoted on a yield basis, the quote represents the bond's yield to maturity
"Basis" is simply another term for YTM in the municipal market
A bond quoted at a "5.00 basis" yields 5.00% to maturity
To convert a yield quote to a dollar price, you need the coupon rate, maturity date, and settlement date

Exam Tip: Gotchas

Term bonds use dollar price quotes; serial bonds use yield/basis quotes. This pairing is frequently tested.

Accrued Interest

When a bond is sold between coupon dates, the buyer pays accrued interest to the seller at settlement. The buyer is reimbursed when the next full coupon payment is received.

Think of it this way: The seller held the bond for part of the coupon period and earned interest during that time. Since the issuer sends the full coupon to whoever holds the bond on the payment date, the buyer must compensate the seller upfront for the days the seller already "worked."

Regular Coupon Accrued Interest

Calculated from (and including) the last coupon payment date up to but not including the settlement date

Accrued Interest Formula:

\text{Accrued Interest} = \frac{\text{Annual Coupon}}{360} \times \text{Days from Last Coupon to Settlement}

Odd First Coupon

A short first coupon covers less than a full 6-month period (bond issued between coupon dates)
A long first coupon covers more than a full 6-month period
Accrued interest on odd first coupons still uses the 30/360 convention

Exam Tip: Gotchas

The BUYER pays accrued interest to the SELLER. The buyer is reimbursed when the next full coupon payment arrives. This direction is commonly tested.

The 30/360 Day Count Convention

Municipal bonds (and corporate bonds) use the 30/360 day count convention:

Every month is treated as having 30 days
February has 30 days (not 28 or 29) under this convention
If a coupon date falls on the 31st, it is treated as the 30th
The year has 360 days (12 months x 30 days)

Formula for days between two dates:

\text{Days} = (Y_2 - Y_1) \times 360 + (M_2 - M_1) \times 30 + (D_2 - D_1)

Example: March 1 to August 1 = 5 months x 30 days = 150 days

Bond Type	Day Count Convention
Municipal bonds	30/360
Corporate bonds	30/360
U.S. Treasury securities	Actual/actual

Exam Tip: Gotchas

Under 30/360, February has 30 days. If a bond pays interest on March 1 and August 1, the accrued interest period is exactly 150 days (5 x 30). The exam may test whether you incorrectly count actual calendar days instead of using 30/360.

Munis and corporates use 30/360; Treasuries use actual/actual. Mixing up the day count convention is a common exam trap.