How to Calculate the Annual Rate of Return on a Bond

Higher-yield bonds produce higher returns.

Higher-yield bonds produce higher returns.

A bond's annual rate of return, or coupon, describes the percentage of its principle that it pays each year in dividends. If you can reinvest returns at the same rate, the returns compound with each year, producing greater annual returns on an increasingly large principle. Bonds that are available for purchase state their annual rate of return, but you can also calculate the desired rate of return for prospective bonds in order to reach a target value at maturity.

Divide the future value that you seek in a bond by the bond's face value.For example, if you seek a future value of $15,000 from a $5,000 bond, divide $15,000 by $5,000 to get a multiplier of 3.

Divide 1 by the term of the bond. For example, if you seek the future value of $15,000 after 20 years, divide 1 by 20 to get 0.05.

Raise the multiplier to the power of this factor. Continuing the example, raise 3 to the power of 0.05 to get 1.056.

Subtract 1 from the result, to get 0.056.

Multiply the answer by 100. With this example, this gives a target annual rate of return of 5.6 percent.

 

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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.

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