Superseding Newton with a Superior Yield Algorithm

14 Pages Posted: 27 Aug 2008

Date Written: August 25, 2008

Abstract

Determining the yield to maturity of a coupon bond with more than four coupon periods is a two-step process. The first step uses an approximation formula to obtain a first approximation of the true yield. The second step uses an algorithm to advance the first approximation closer to the bond's true yield. Newton's Method is the algorithm used in applications such as Microsoft's Excel "YIELD" function. This paper evaluates some commonly used approximation formulae before demonstrating a solution algorithm that generally outperforms Newton's Method.

Keywords: bond yield, Newton's Method

JEL Classification: G12

Suggested Citation

Deeley, Christopher Michael, Superseding Newton with a Superior Yield Algorithm (August 25, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1253166 or http://dx.doi.org/10.2139/ssrn.1253166

Christopher Michael Deeley (Contact Author)

Charles Sturt University ( email )

School of Accounting & Finance
Wagga Wagga, NSW 2650
Australia
+612 69332694 (Phone)
+612 69332790 (Fax)

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