Municipal Confirmation Disclosures: Yield to Call (YTC) vs. Yield to Maturity (YTM)
A customer purchases a callable municipal bond in the secondary market at a price of 105 (a premium to par). The bond matures in 15 years and is callable in 5 years at par (100). Under MSRB confirmation disclosure rules, which yield must the broker-dealer show on the customer's trade confirmation as the required 'Yield to Worst'?
Under MSRB rules, trade confirmations for premium bonds must show Yield to Call (YTC) because the call yield represents the 'Yield to Worst' (the lowest potential yield).
Complete Analysis & Legal Rationale
MSRB Rule G-15 mandates that trade confirmations disclose the lower of Yield to Maturity (YTM) or Yield to Call (YTC) — commonly referred to as the 'Yield to Worst' (YTW): (1) When a bond is purchased at a PREMIUM (price > 100), the Yield to Call is LOWER than the Yield to Maturity, because the premium is amortized over a shorter period of time. Therefore, confirmations for premium bonds callable at par must show YTC; (2) When a bond is purchased at a DISCOUNT (price < 100), YTM is lower and must be disclosed.
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:
Under MSRB rules, trade confirmations for premium bonds must show Yield to Call (YTC) because the call yield represents the 'Yield to Worst' (the lowest potential yield).
Fails to adhere to municipal bond rules regarding B.
Fails to adhere to municipal bond rules regarding C.
Fails to adhere to municipal bond rules regarding D.
Official Standard: MSRB Rule G-15 mandates that trade confirmations disclose the lower of Yield to Maturity (YTM) or Yield to Call (YTC) — commonly referred to as the 'Y