Bonds are generally long-term investment vehicles. They take several years to mature, and they earn interest during each year the investor holds onto them. Many bonds pay interest to investors twice a year, or on a semi-annual basis. Investors can calculate the rate of return on these bonds, also known as the bond yield, which tells them how much money they are likely to earn if they purchase the bond and keep it until it matures.
1. Write down information about the bond. To calculate the semi-annual yield on a bond, you need to know the bond's purchase price and par value in addition to its annual coupon rate and how many years are left before the bond matures.
2. Divide the annual coupon rate by two to get the semi-annual rate. For example, if the annual rate is 6 percent, the semi-annual rate is 3 percent.
3. Multiply the years to maturity by two to get the number of compounding periods remaining until the bond reaches maturity. For example, if the bond will reach maturity in four years, there are eight compounding periods left before the bond matures.
4. Multiply the bond's face value by the semi-annual interest rate to determine the semi-annual payment amount. For example, if the bond's face value is $1,000 and the semi-annual interest rate is 3 percent, the semi-annual payment rate is $30.
5. Use a financial calculator to estimate the semi-annual bond yield. You cannot calculate the precise yield because of market factors. Financial calculators can estimate the yield with greater precision than you can figure by hand. Enter the amount you paid for the bond as a negative number for the bond's present value, or PV. For example, if you paid $900 for the bond, enter "-900" as the PV value. Enter the bond's total value as the future value, or FV. For example, if the bond is worth $1,000, enter "1,000" as the FV value. Enter the semi-annual payment amount as the PMT value. Enter the number of compounding interest periods left as the "n" value. Press "i" on your calculator to determine the semi-annual yield rate.
Items you will need
- Financial calculator
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