Arbitrage yield is the maximum investment rate for tax-exempt bond proceeds allowed by the federal government on a municipal bond issuance.
The calculation of the arbitrage yield is the rate, compounded semi-annually, required to have the sum of the present value of the principal and interest cash flows, taking into account if the bond is callable, equal to the target value for the calculation.
The amount of money received from the sale of the securities is defined as:
+ lFace amount of the bond series
- lCombined original issue discount (OID)
+ Combined original issue premium (OIP)
- Bond insurance premium or surety cost (if applicable)
+ Accrued interest
= lMoney received
TIC is the rate, compounded semi-annually, required to have the sum of the present value of the principal and interest cash flows, ignoring callability, equal to the bond proceeds (i.e., money generated from sale of bonds), or other target value, generated from the issuance.
The amount of money received from the sale of the securities, the target value is defined as:
+ lFace amount of the bond series
- lCombined original issue discount (OID)
+ Combined original issue premium (OIP)
- Bond insurance premium or surety cost (if applicable)
+ Accrued interest
- Underwriter's Discount
= lMoney received
All-In TIC is the rate, compounded semi-annually, required to have the sum of the present value of the principal and interest cash flows, ignoring callability, equal to the bond proceeds – the money generated from sale of bonds – generated from the issuance less the expenses of the bond issuance.
The amount of money received from the sale of the securities less the expenses of the bond issuance is defined as:
+ lFace amount of the bond series
- lCombined original issue discount (OID)
+ Combined original issue premium (OIP)
- Bond insurance premium or surety cost (if applicable)
+ Accrued interest
- Underwriter's Discount
- lCost of insurance expenses
= lMoney received
NIC calculates the interest expense to the issue, not taking into account time value of the interest payments. The NIC was very popular prior to computers since it is an easy formula to calculate.
Average life is the point where half of the principal has matured. The average life provides a sense of how rapidly the principal is amortizing, not taking into account if the bond is callable.