how to calculate bond return

The math is straightforward: if a bond returns 4% in a given year and the current rate of inflation is 2%, then the real return is 2%. Divide the total return by the number of years you held the bond to calculate the annual return. Formula for Rate of Return. To calculate the annual rate of return on a bond, divide the bond's interest earned and price appreciation by the bond's value at the beginning of the year. They also aren't much help if your bond is called early—or if you want to evaluate the lowest yield you can receive from your bond. How to Calculate Bond Value: 6 Steps (with Pictures) - wikiHow Fixed Income Securities. Calculating Bond Duration Calculating bond duration by hand (or on a spreadsheet) is time-consuming. What is 72 in the Rule of 72? Then subtract from this amount your original investment amount. A bond's holding period return is approximately the sum of its yield income + return from changes in yield. A bond is valued at a discount if the interest rate stated on the bond is less than the interest rate on newly issued bonds. You may incur a gain or loss by buying a bond and selling it before the maturity date. All coupons are reinvested at the YTM or YTC, whichever is applicable. If you want to know the real rate of return on a nontaxable municipal bond, that is the rate that would be equivalent on a taxable bond, you would perform the following calculation: Tax-equivalent yield = 0.025 ÷ (1 - 0.25), or 0.025 ÷ 0.75 = 3.33%. This article was co-authored by Michael R. Lewis. The more you have to pay, the lower your annual rate of return on the bond will be. There are three main yields applicable to dated bonds: Coupon rate. Using the example above, whether you bought the bond at a discount or a premium, you would receive $500,000 upon maturity. Calculate present value of interest payments. This is the coupon multiplier. 7. Note that any capital gain is considered income by the IRS and you must pay taxes on the interest earned. Most bonds are now issued in book entry form. This rate will never be negative. Calculate bond returns from yields. Every bond issued will have a unique name or symbol. There are several definitions that are important to understand when talking about yield as it relates to bonds: coupon yield, current yield, yield-to-maturity, yield-to-call and yield-to-worst. The standard formula for calculating ROR is as follows: Keep in mind that any gains made during the holding period of the investment should be included in the formula. The annual yield is $50,000 / $540,573 = 9.25 percent. The total return on your bond is ($3,575 interest) - ($200 capital loss) = $3,375. The straight-line method of amortization of bond premium amounts is one way of spreading out interest income over the life of the bond. In this video I will explain how to calculate the rate of return on bond investment. Indeed, yield curves can be flatter or steeper depending on economic conditions and what the Federal Reserve Board (or the “Fed”) is doing, or what investors expect the Fed to do, with the money supply. A fixed-income security, such as a bond, provides three different types of returns, and a yield measure used by the investor should consider all these three sources of return. In this case, you held the bond from January 1st to December 15th of the final year of ownership. A bond's yield is the return to an investor from the bond's coupon and maturity cash flows. The expected return on a bond can be expressed with this formula: RET e = (F-P)/P Where RET e is the expected rate of return, F = the bond's face (or par) value, and Since you owned the bond for the full month of December, you are entitled to receive the interest paid for that month. This reduces how much you have to pay in taxes. In this example, the company would set the selling price at $463,202. For example, if the bond pays a 3.5 percent, semi-annual coupon, add 1 to 0.035 to get 1.035. The calculation of YTM takes into account the current market price, par value, coupon interest rate and time to maturity. Divide the interest payments received by the bond fund investment to figure the income return. Assume that your interest income and a gain on a bond sale total $3,675. For instance, a $1,000 bond held over three years with a $145 return has a 14.5 percent return, but a 4.83 percent annual return. Divide the interest payments received by the bond fund investment to figure the income return. There is no gain or loss on the bond. To calculate the bond coupon rate we add the total annual payments then divide that by the bond’s par value: ($50 + $50) = $100; $100 / $1,000 = 0.10; The bond’s coupon rate is 10 percent. Inputs : Current Price: $ Par Value: $ Coupon Rate: % Years to Maturity: Results: Current Yield: % Yield to Maturity: % Bond Yield Formulas See How Finance Works for the formulas for bond yield to maturity and current yield. For values of your electronic bonds, log in to your TreasuryDirect account. The face amount will be in multiples of $1,000. Divide the annual return by the purchase price of the bond to find your percentage return on the bond. For example, if a share costs $10 and its current price is $15 with a dividend of $1 paid during the period, the dividend should be included in the ROR formula. You can use your capital losses from investments to reduce your capital gains. Fortunately, there is a spate of financial calculators available—some that even estimate yield on a before- and after-tax basis. The bond pays 6% interest, and you hold the bond for 5 year and 11 ½ months. Say, for example, that your bond pays interest on February 1st and August 1st of each year. If you own the bond during a particular month of year, you earn the bond's interest during that period. {"smallUrl":"https:\/\/www.wikihow.com\/images\/thumb\/c\/c5\/Calculate-Bond-Total-Return-Step-1-Version-2.jpg\/v4-460px-Calculate-Bond-Total-Return-Step-1-Version-2.jpg","bigUrl":"\/images\/thumb\/c\/c5\/Calculate-Bond-Total-Return-Step-1-Version-2.jpg\/aid1519460-v4-728px-Calculate-Bond-Total-Return-Step-1-Version-2.jpg","smallWidth":460,"smallHeight":345,"bigWidth":728,"bigHeight":546,"licensing":"