Quotes

In the corporate bond chapter, we learned that corporate bonds are quoted as a percentage of par in 1/8ths. Municipal bond quotes often look different. Municipal bonds are typically quoted in yields, like this:

7% municipal bond trading on a 5% basis

Without a financial calculator, you usually can’t determine the exact dollar price from a quote like this. You can, however, tell whether the bond is trading at a discount or a premium.

• The first percentage (7%) is the coupon rate.
• The basis (5%) is another way of stating the yield to maturity (YTM).

From the bond fundamentals chapter, remember this key relationship:

• A bond trades at a premium when its YTM is lower than its coupon.

In the example above, the YTM (5%) is lower than the coupon (7%), so the bond is trading at a premium.

Most municipal bonds are quoted this way, but not all. Municipal dollar bonds (usually revenue bonds) are quoted like corporate bonds: as a percentage of par in 1/8ths. The Series 7 exam typically focuses on general rules, so you should assume municipal bonds are quoted in yields unless the question tells you otherwise.