What is the 'Constant Yield Method'
The constant yield method is one of two ways of calculating the accrued discount of bonds that trade in the secondary market. The constant yield method is an alternative to the ratable accrual method, and although it usually results in a lesser accrual of discount than the latter method, it is also requires more complex calculations.
BREAKING DOWN 'Constant Yield Method'
The constant yield amount is calculated by multiplying the adjusted basis by the yield at issuance and then subtracting the coupon interest. This method is also known as the effective or scientific method of amortization. The decision to use the constant yield method is irreversible, and is similar to the method the IRS prescribes to computer taxable original issue discount as outlined in IRS Publication 1212.