How to Calculate the Discount Rate for a Treasury Bond

by C. Taylor

Treasury bonds offer one of the least risky investments available, because they are backed by the U.S. government. The price for this security comes in the form of lower yields. The yield of a treasury bond is considered its discount rate and describes the difference between the present-day purchase price and the face value of the bond, which is paid when the bond matures. To calculate the discount rate, you assess these price differences and determine the annual rate that equalizes the bond's value between current and future times.

Divide the face value of the treasury bond by its net present value. As an example, if a $1,000 treasury bond's net present value was $200, then you would divide $1,000 by $200 to get 5.

Take the nth root of that number, where "n" is the number of years before the bond matures. On a business or scientific calculator, you would enter the base number, press "X-root-y" button and enter the root. If the example used a 30-year bond, then you would calculate the 30th root of 5, which results in 1.055.

Subtract 1 from this figure to calculate the discount rate. In the example, the Treasury bond had a discount rate of 0.055, or 5.5 percent.

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