A U.S. Treasury bond's value is a combination of its principal, or printed value, and its coupon payments. This future value of the bond exceeds the amount that you pay for it because of the bond's interest, which pays twice a year, and because you may pay less for the bond than its par value. The total percentage interest yield of the bond therefore exceeds the bond's coupon rate. Analysts call this yield the bond's yield to maturity, and you can calculate it with a financial calculator.
Multiply the Treasury bond's coupon by its princaliple. For example, if a $10,000 bond offers a 2.51-percent coupon, multiply $10,000 by 0.0251, giving $251. This is the bond's annual interest yield.
Press the "PMT" button on the calculator. Enter the interest yield that you calculated in the previous step.
Press the "FV" button. Enter the bond's future value, which is equivalent to its principal.
Press the "PV" button. Enter the amount that you pay for bond. For example, if you paid $6,000, enter "6000."
Press the "N" button. Enter the number of years before the bond matures. For example, if it's a 20-year U.S. Bond, enter "20."
Press the "1/yr" button, and press "compute." The calculator will display the percentage interest yield. With this example, this is 11.99 percent.
Items you will need
- Financial calculator
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