Constant Yield Method


DEFINITION of 'Constant Yield Method'

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.

  1. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  2. Ratable Accrual Method

    A method for determining when and how much income was earned ...
  3. Yield

    The income return on an investment. This refers to the interest ...
  4. Original Issue Discount - OID

    The discount from par value at the time that a bond or other ...
  5. Discount

    The condition of the price of a bond that is lower than par. ...
  6. Maturity

    The period of time for which a financial instrument remains outstanding. ...
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