Municipal Bond Confirmation: Yield to Worst (YTW) Rule for Premium Bonds
A registered representative sells a 5% municipal bond maturing in 20 years to a customer at a price of 106 (a premium). The bond is callable in 5 years at par ($1,000). Under MSRB confirmation rules, which yield MUST be printed on the confirmation as the quoted yield?
Under MSRB Rule G-15, customer confirmations must state the 'Yield to Worst' (YTW). For bonds traded at a PREMIUM subject to a call, Yield to Call (YTC) is always LOWER than Yield to Maturity (YTM), so YTC must be shown.
Complete Analysis & Legal Rationale
When an investor buys a premium bond ($1,060), amortizing the $60 premium over 5 years to the call date produces a lower annualized yield than amortizing it over 20 years to maturity. The lower yield (YTC) must be quoted.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
MSRB confirmation rule mandates quoting Yield to Call for premium callable bonds (YTW).
YTM is higher than YTC on premium callable bonds; quoting YTM misleads the customer.
Nominal coupon (5%) ignores the $60 premium loss upon call.
Current yield does not account for principal loss upon redemption.
Official Standard: Mandates Yield to Worst disclosure for callable premium municipal debt.