Municipal Bond Forum
The math behind refinancing
Q
In your article, “The Upside of Lower Rates,” on issuers who refinance or pre-refund their bonds, I do not understand the math in the example explaining the yield drop after the bonds are escrowed in Treasuries. I understand the yield would be lower because of the additional $7,000.00 invested, but I cannot arrive at a figure of 2%.
A
James A. Klotz responds:
Now that the bonds have actually been escrowed, they can be sold for 109.00.
If they were priced at 107.00, as we estimated in our commentary, the yield to maturity would be approximately 2.00%.
This calculation requires a bond yield calculator, since the premium, declining to 100.00 in 2014, needs to be factored in.
Start here.
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