Question

You sell a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield must be stated as the yield to ________?

1) Maturity
2) Call
3) Coupon
4) Yield

Answer 1

The yield on the bond must be stated as the yield to Call.

Step-by-step explanation:

When selling a municipal bond that has been advance refunded and will be called at 102 four years from now, the yield on the bond must be stated as the yield to Call. This means that the yield is calculated based on the call price at which the bond will be redeemed, rather than the maturity date.

To calculate the yield to call, you would use the same formula as calculating yield to maturity, but instead of using the bond's maturity date, you would use the call date and call price. The formula would be:

Yield to Call = ((Call Price - Purchase Price) / Purchase Price) * (365 / Days until Call)