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.
- Stanford University: Interest Rates and Bond Yields
- Fundamentals of Financial Management; Eugene F. Brigham, Joel F. Houston
- Fixed Income Securities: Tools for Today's Markets; Bruce Tuckman
- U.S. Securities and Exchange Commission. "Investor Bulletin Interest Rate Risk—When Interest Rates Go up, Prices of Fixed-Rate Bonds Fall," Accessed March 11, 2019.
Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.