Municipal Securities: Markets, Pricing and Trading
Market structure
Munis trade in an over-the-counter, dealer market with no central exchange. Dealers quote and negotiate, inter-dealer brokers handle dealer-to-dealer flow, and EMMA supplies pre-trade and post-trade transparency. MSRB Rule G-14 requires dealers to report executions to the Real-Time Transaction Reporting System within 15 minutes. Regular-way settlement is T+2; when-issued trading occurs before bonds are delivered.
Pricing conventions
Dollar prices are quoted as a percentage of par, traditionally in 1/8 of a point ($1.25 per $1,000); yields are quoted in basis points against a AAA benchmark scale. Bonds are commonly priced and quoted to yield to worst - the lowest of yield to maturity and the yields to each call date. Premium callable bonds are priced to the earliest par call; discount bonds to maturity.
Accrued interest uses a 30/360 convention: count from the last coupon date to settlement, excluding settlement day. The buyer pays dollar price plus accrued interest; accrued interest is not dealer compensation.
Yield tools: current yield = coupon ÷ price; YTM assumes reinvestment at the yield; taxable-equivalent yield = muni yield ÷ (1 − marginal tax rate).
Trap: quoting yield to maturity on a premium callable bond overstates the likely return; exam answers want yield to worst. A second trap: a lower dollar price does not always mean a higher yield when call dates differ.
Worked example: a 3.00% muni for an investor in a 35% bracket has a TEY of 3.00 ÷ 0.65 = 4.62%, so it beats a comparable taxable bond yielding 4.50%.