The value of a Treasury bond is based on two components: the “coupon” refers to the interest rate that the bond earns, and the “principal” is the bond's value upon which this interest is calculated. The coupon rate and actual yield are not the same. You may pay more or less than the bond's principal when you buy it, and the bond's yield depends on the amount you pay. Investors refer to this interpretation of the yield as the “yield to maturity” or the bond's market rate of interest. You can calculate this value using a financial calculator.
1. Calculate the bond's annual interest yield, which is the product of its principal and coupon. For instance, if you pay $7,250 for a 10-year $10,000 Treasury note with a 2.42 coupon, multiply $10,000 by 0.0242 to get $242.
2. Press the calculator's “Payment” button and enter the interest yield. Enter $242 for this example.
3. Press the calculator's “Present Value button” and enter the amount paid for the bond, which is $7,250 in this example.
4. Press the calculator's “Future Value” button and enter the bond's principal. Continuing the example, enter $10,000.
5. Press the calculator's “Periods” button and enter the number of years until the bond matures. To complete this example, enter "10."
6. Press the “Compute” button on the calculator to display the bond's yield, which is 12.38 percent.
Items you will need
- Financial calculator
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