Eric said:

I think I understand about adjusting the basis of a bond

each year for the premium paid for the bond, but what I'm

puzzled by is the exact calculation for the IRS's Constant

Yield Method. Here's a quote from Pub 550 on how to

determine the yield:

Step 1: determine your yield. Your yield is the discount

rate that, when used in figuring the present value of all

remaining payments to be made on the bond (including

payments of quali- fied stated interest), produces an amount

equal to your basis in the bond. Figure the yield as of the

date you got the bond. It must be constant over the term of

the bond and must be figured to at least two decimal places

when expressed as a percentage.

Yay, Congress. On the other hand, I can't really blame

them, since that's an economically correct thing to do.

In English, they are asking you to compute the

yield-to-maturity of your bond, given the exact price you

paid for it. So if you can find some physical or on-line

calculator that can do that YTM calculation, their answer is

the yield you're looking for.

In more jargonized English, they are asking you to compute

the internal rate of return (IRR) of the series of cash

flows represented by your purchase price, the period

payments of interest by the bond, and the final redemption

of principal of the bond (or cash received from the call, as

the case may be).

The Invest FAQ (

http://www.invest-faq.com) has some articles

on IRR and net present value (NPV) that might be of some use

to you.

If you have access to Excel (and quite possibly some other

spreadsheets) check the documentation and online help and

see if there are any financial functions. I know that Excel

can do a number of different IRR calculations and a bunch of

bond amortization and yield calculations. However, those

functions may not be installed by default. You might have

to run Office Setup and install the Analysis Toolpak (or

some similar name) for Excel.

You might have some luck with some financial calculators

(like the HP-12C) as well.