Constant Yield Amortisation

PURPOSE

To illustrate the model and formulae for calculating amortization of premium (accretion of discount) amount that will generate a constant yield when a bond is held to maturity.

WHY IS THIS IMPORTANT?

Carrying value for bonds where bonds held to maturity needs to be stated in the financial statement at amortized (accreted) price that gives a constant yield to maturity.

PROCEDURE

1. CS Lucas provide an amortization (accretion) schedule for bond that are held to maturity.

2. This guide explain using an excel model how this schedule is computed.

3. Consider a bond with the following parameter

Issue Date 15-Jul-14

Maturity Date 15-Jul-16

Coupon 1.2% semi-annually

4. This bond was purchased at a price of 100.10 on 24-May-16.

5. We explain the construction of a model to 1) compute the constant yield amount that is required to amortized the carrying value from 100.10 on 24-May-16 to 100.00 on 14-Jul-16.  The convention of amortizing from the first day but not the last.

6.  The model

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7.  The goal seek

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8. Model for accretion.

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FREQUENTLY ASKED QUESTIONS

 

RELATED INFORMATION

Constant Yield Amortization/Accretion Model

CHANGE HISTORY

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