Superseding Newton with a Superior Yield Algorithm

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.