Constant Yield Method

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Ratable Accrual Method

    A method for determining when and how much income was earned ...
  2. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  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. Bond

    A debt investment in which an investor loans money to an entity ...
RELATED FAQS
  1. What does it mean when a bond is selling at a premium? Is it a good investment?

    When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of ... Read Full Answer >>
  2. What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...

    In capital budgeting, projects are often evaluated by comparing the internal rate of return, or IRR, on a project to the ... Read Full Answer >>
  3. What is the rationale behind the effective interest rate?

    There are several different effective interest rates. In accounting, the effective interest method examines the relationship ... Read Full Answer >>
  4. What is the difference between compounding interest and simple interest?

    Interest is the cost of borrowing money, where the borrower pays a fee to the owner for using the owner's money. The interest ... Read Full Answer >>
  5. What is the relationship between modified duration and interest rates?

    Modified duration is a formula that measures the value of a bond in relation to changes in interest rates. Modified duration ... Read Full Answer >>
  6. What does positive theta mean for credit spreads?

    Theta is an option Greek that measures the rate of change in an option's value with respect to the passage of time. When ... Read Full Answer >>
Related Articles
  1. Retirement

    Tax Tips For The Individual Investor

    We give you seven guidelines to help you keep more of your money in your pocket.
  2. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  3. Options & Futures

    Brokers and Online Trading

    How do you find the right broker for your investment needs? Start by reading our broker tutorial.
  4. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  5. Investing Basics

    What's the Primary Market?

    The primary markets are where investors can get first crack at a new security issuance.
  6. Investing Basics

    Treasury Inflation-Protected Securities (TIPS)

    Treasury inflation-protected securities are treasury securities that make adjustments for inflation as reflected in the Consumer Price Index.
  7. Investing Basics

    What is the Coupon?

    In the financial world, “coupon” represents the interest rate on a bond.
  8. Investing Basics

    Explaining the Coupon Rate

    Coupon rate is the stated interest rate on a fixed income security.
  9. Retirement

    Facing Retirement? Look Beyond 100% Bonds

    Retiring doesn't mean putting all your money in bonds. There are two things to consider when it comes to be invested in bonds: growth and inflation.
  10. Mutual Funds & ETFs

    Is the PowerShares (PFEM) ETF a Good Bet Now?

    What you need to know if you are considering trading PowerShares Fundamental Emerging Markets Local Debt ETF.

You May Also Like

Hot Definitions
  1. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  2. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  3. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  4. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
  5. Adverse Selection

    1. The tendency of those in dangerous jobs or high risk lifestyles to get life insurance. 2. A situation where sellers have ...
Trading Center