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 $1,155,000 07/01/2014 100.000 $1,220,000 07/01/2015 100.000 $830,000
There are no other call provisions.
The bond is currently priced at $103. 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 $30 per bond.
How do I correctly calculate the yield to maturity?