How Do I Calculate A Bond Yield?
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Calculating bond yields is an easy way to find out exactly how much money you’re earning by investing in a bond. It can help you to figure out when you should cash your bond, how much you could potentially earn by letting your bond fully mature and how much you earn every year by allowing the bond to mature. Calculating bond yields is also much easier than most people think. In order to calculate a bond yield, all you need in your original savings bond, the interest rate that it yields annually (usually found on the bond or through a quick Internet search) and a calculator. That’s all it takes to calculate a bond yield.
Doing Calculations On A Bond Yield
In order to calculate your bond yield, all you need to do is follow a few simple steps:
1. Understand exactly what “net yield” means. In order to calculate it, you will be taking into account the annual interest payments that you will be receiving every year for holding on to a bond and the amount of money that you will be paid at the time of full bond maturity.
2. Use the interest rate of your bond to figure out how much you will receive annually on a bond. For instance, if you have a $1000 bond and that bonds pays 5 percent annual interest, you can expect to make about $50 per year with the bond.
3. Figure out the total increase in the bond’s value annually and over the course of the bond’s life. For example, if you pay $937.50 for a $1000 bond and that bond is set to mature over the course of 10 years, that bond is scheduled to make about $6.25 every year and $62.50 total before the bond matures.
4. Once you’ve finished the 3 steps above, it’s time to calculate your average annual investment. Using the example above, the bond that you purchased rose in value $6.25 per year. That means that the bond would be worth about $965.63 on average in any given year.
5. To determine the bond’s average annual yield, you’ll be trying to figure out the annual increase in the your bond’s value plus the yearly interest payment made on the bond. Using the same example, the average annual yield would be $56.25 because you’d see a $6.25 annual increase in the value of your bond plus the $50 annual payment based on your interest rate.
6. Finally, figure out the net yield on your bond by taking the average annual yield of your bond and dividing it by your average annual investment. Using this bond example, the net yield is 5.83 percent after you divide $956.63 by $56.25.
Why Calculating Your Bond Yield Matters
You invest in a bond to make money. Calculating your bond yield reveals how much money you stand to make and lets you know why holding on to a bond is so important. Letting your bond reach full maturity can net you more money than cashing it before it fully matures. Your bond yield shows how.
- What Are Bond Yields?
- What Is A Government Bond?
- When Do Bonds Mature?
- What Are High Yield Bonds?
- Are Bonds Guaranteed Investments?
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