A corporate bond offers annual or semi-annual returns, based on its simple interest coupon yield. When a corporate bond matures, it pays the unchanging face value of the bond, which is typically $1,000. Your actual purchase price may vary from this figure by buying on a discount or paying a premium. The difference between your purchase price and the face value influences your overall return, which is called yield to maturity.
1. Subtract the purchase price of the bond from the face value to calculate your discount or premium. As an example, if you purchased a $1,000 bond for $950, then your discount would be $50.
2. Divide this value by the number of years to maturity. In the example, a 10-year bond would mature in 10 years, so divide $50 by 10 to get an amortized discount of $5.
3. Multiply the coupon yield, in decimal format, by the face value of the bond. This gives you your annual coupon payment. In the example, if the coupon yield was 8 percent, you would multiply $1,000 times 0.08 to get an annual coupon payment of $80.
4. Add the amortized discount to the annual coupon payment to calculate annual return. In the example, this gives you $85.
5. Add the purchase price of the bond to its face value, and then divide by 2. This calculates the average price over the bond's term. In the example, $950 plus $1,000 gives you $1,950. Dividing by 2 gives you an average price of $975.
6. Divide the annual return by the average price to calculate yield to maturity. In the example, $85 divided by $975 gives you a yield to maturity of 0.0872, or 8.72 percent.
- Spencer Platt/Getty Images News/Getty Images