My friend bought his tax-exempt bond at a premium. If he uses the constant yield method, it effectively amortizes the bond over the entire remaining life of the bond. The premium amortization doesn't change the fact that the bond interest, minus its premium amortization, is tax-exempt anyway. But it adjusts his cost basis so that the unamortized portion of the premium can be deducted if he prematurely sells the bond or it is called early, right?
If a broker subjectively amortizes the premium up to the earliest call date, the premium amortizes very quickly and the ACB is the par value at time of call. There exists no absolute certitude that a bond will be called. Otherwise, the maturity date totally becomes irrelevant and the YTM calculations made by the broker are perhaps misleading. Depends on the course future interest rates and circumstances of the Issuer or of the bond markets. Why is the broker making that judgment (i.e. amortizing to the first call date)? Is this cast in stone? Can we not substitute the ACB at time of call to the ACB derived from amortizing the premium up to the maturity date, using the IRS prescribed constant yield method? What's your opinion?
