Bonds and notes are debt securities of the issuing institution, which may be a corporation, a municipality or a government entity. When you buy a bond or note you are loaning money to the issuing institution in exchange for a promise from the issuing institution of a return of the face value of the bond or note at maturity, plus regular interest payments. Calculating the return on your investment involves such factors as purchase price, maturity and face value of the bond or note.
1. Determine the face value and the purchase price of the bond or note. Ascertain the maturity date of the bond or note. Identify the stated interest coupon rate of the bond or note. You may usually obtain price, interest rate and maturity information from the broker who handled your transaction or from the registrar of the institution that issued your bonds or notes.
2. Subtract the purchase price of the bond or note from its face value. This may result in a positive or negative number depending on whether you paid a premium for the security or bought it at a discount. Divide the remainder by the security's number of years to maturity. Add the result to the stated interest coupon rate. This will give you your numerator.
3. Add the face value of the bond or note to the purchase price of the security. Divide the sum by two. This is your denominator.
4. Divide the numerator by the denominator. The result is your investment yield to maturity.
- Note that the term "coupon rate" refers to the interest rate the bond's issuer ascribes to the bond and is not necessarily the bond's current yield. Old-style bearer bonds came with interest coupons that could be clipped and redeemed at local banks. Most bonds now come only in registered form. There are few bearer bonds that still carry coupons, although bond interest rates are still referred to in that fashion.
- Investments in bonds and notes involve risk. Bonds and notes issued by agencies of the federal government are considered among the safest investments when held to maturity because they are backed by the full faith and credit of the United States government. The price of these bonds and notes may fluctuate in the open market. If you sell prior to maturity you may lose some of your investment.
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