| DEFINITION: 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.
| EXAMPLE: 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).