The interest rate basis is the date count methodology used when calculating interest. Different types of securities use different day count methodologies.
Municipalities and interest basis
Different types of securities use different day count methodologies.
For instance, fixed municipal notes and bonds use a 30/360-day count when calculating the number of days to charge interest.
In 30/360, each month is considered to have 30 days, no matter how many actual days are in the month.
Start date: 01/01/2022; End date: 03/01/2022; 60 days total (30 days in January, 30 days in February)Start date: 01/15/2022; End date: 03/01/2022; 46 days (16 days in January, 30 days in February)
As you can see, both of these assume that there are 30 days in each month.
What’s important here?
Municipal variable rate debt can be calculated using either 30/360 or Actual/360 or Actual/365, depending on how the bond documents are written.
Methodologies include the following:
- Stated Rate Method: This is annual interest with the 365/365 method. For example, 4% stated rate on a $10 million loan means interest of $400,000, which is ($10,000,000 x 0.04)/365) x 365.
- Bank Method: This is the 360/365 method. It uses a 360-day year and charges interest for the actual number of days the loan is outstanding, resulting in more interest. This would be an additional $5,555 of interest in the $10 million loan example because the $400,000 is accrued on day 360 of the Bank Method, with five days remaining in the actual year to be paid (or 4.05% annual interest).