Yield of a municipal bond with a sinking fund?
How do I calculate my expected return if I buy a municipal bond at a premium with a sinking fund feature?
For example, I'm looking at a bond with a coupon of 5.5%, maturing July 2015, with the following sinking fund schedule:
Date Price Amount
07/01/2013 100.000 ,155,000
07/01/2014 100.000 ,220,000
07/01/2015 100.000 0,000
There are no other call provisions.
The bond is currently priced at 3. My broker states the yield to maturity as 3.8%. I don't think this yield figure is correct. If I understand the redemption process correctly, more than a third of the bonds I would buy now (in May 2013) would be called at par in less than 60 days, resulting in a capital loss of per bond.
How do I correctly calculate the yield to maturity?
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You should refer to the following link to better answer your question.
trades.municipalbonds.com/bonds/issue/226688BB4
If you look at the Date of May 6th, the OP pasting date, you can lok at the chart and see what the YTM was near the quoted price of 103. It was slightly higher than his broker quoted him, coming in at 3.934.
As for calculating the YTM yourself you have several options;
Use "Yield" in excel, this is my preference as you can make side by side comparisons of several muni's.
Use an online calculator-I like www.moneychimp.com/articles/finworks/fmbondytm.htm look for the "pop-up" calculator. Be mindful that this is extremely simplified.
Search the Cusip and rely on the issuers calculations.
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