U.S. Treasury bonds are considered to be among the world's safest investments because repayment is guaranteed by the U.S. government. They also generate reliable fixed interest payments for a specific duration of time. Although the interest rate is printed directly on the bond, the percentage return varies depending on whether you bought the bond at face value, at a discount or at a premium. Calculating the return on a bond requires only a little bit of simple math based on the price you paid for the bond, its interest rate and how long you hold the bond.
1. Look up the coupon rate listed on the bond. This is the annual interest rate it pays, although in practice it is divided into two semi-annual payments.
2. Convert the coupon rate to a decimal by dividing it by 100. For example, a bond with a coupon rate of 6.5 percent would be 0.065 as a decimal.
3. Multiply the decimal rate by the face value of the bond and the number of years you will hold it to calculate its total return in interest. For example, if you buy a $100 bond when it still has 22.5 years to maturity and you plan to hold it the whole time, your return will be 0.065 times $100 times 22.5, which is $146.25 in interest.
Return at Sale
1. Look up the price of the bond when you bought it. A $100 bond will be priced at $100 when you buy it directly from the federal government when it is issued, but its price may fluctuate on the secondary market if market interest rates increase or decrease after the bond is issued. For example, you may have bought a $100 face-value bond for $96 on the open market.
2. Determine the price for which you will sell the bond. If you hold it to maturity, the U.S. Treasury will redeem it for $100. If you sell it on the secondary market before it matures, you may get more or less than that.
3. Subtract the purchase price from the sale price to determine your return when you sell the bond. In this case, if you sell the bond back to the government for $100 after buying it for $96, the return you get at the time of the sale is $4.
Total Treasury Bond Return
1. Add together the return from interest and the return at sale to get the dollar amount for the total return on the bond. In this example, your total return is $146.25 plus $4, which is $150.25.
2. Divide the total return by the number of years you held the bond to calculate the annual return. In this example, $150.25 divided by 22.5 is $6.68.
3. Divide the annual return by the purchase price of the bond to find your percentage return on the bond. In this case, $6.68 divided by $96 is 0.07, or 7 percent interest. Compare this to other prevailing interest rates to determine whether the bond is a good investment.
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