The bond market is a complicated entity. While the idea of a bond may seem simple, the kinds of trades that it is subject to can create complexities in figuring your profits. In simple terms, a bond is something you purchase that pays you interest each year over the term of the bond. At the end of the term, when the bond matures, you get your full investment back. This is called YTM or yield to maturity. Complications come in when you buy a bond in a secondary market. Then you may pay more or less than the original, or par, price. For a basic calculation, figure your interest over the period and add or subtract the difference from par.
Multiply the par price of the bond by the interest it is paying. If the par price is $1,000 and the interest is 5 percent, that yields $50 each year.
Multiply the interest earned per year by the years to maturity on the bond. In this example, if there are 10 years remaining, that is $500.
Subtract the price paid for the bond from the par, what you will get back at maturity, and sum that with your total interest from Step 2. If you paid par, there is no difference. If you paid more than the par because the interest rate was desirable, subtract the difference from your interest total. If you paid less than par, add the amount to your interest. For example, if you paid $1,050 and the par is $1,000, subtract $50 from the interest total, leaving a net profit on your bond of $450.
- Citibank Online: Figuring a Bond's Worth
- U.S. Securities and Exchange Commission. "Investor Bulletin: Fixed Income Investments — When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall." Accessed April 19, 2020.
- Moody's Investors Service. "Look up a rating." Accessed April 19, 2020.
- S&P Global. "Ratings." Accessed April 19, 2020.
Bill Brown has been a freelance writer for more than 14 years. Focusing on trade journals covering construction and home topics, his work appears in online and print publications. Brown holds a Master of Arts in liberal arts from St. John's University and is currently based in Houston.