Municipal Bond Coupon Schedules with Limitations on the Number of Coupons

The optimum coupon schedule for serial bonds issued by municipalities has been solved as a knapsack problem, and is widely implemented in bank and nonbank underwriting firms. A large subset of issues carries the additional requirement that limits the number of distinct coupons which the underwriters may assign to the issue. The paper formulates this problem as a dynamic programming model and discusses the computational aspects relating to this formulation by comparing it with a direct 0/1 integer programming model. Some computational experience is also provided.