How to Calculate Bonds & Notes

by Ryan Menezes, Demand Media
    Bonds offer little risk but limited returns.

    Bonds offer little risk but limited returns.

    When you buy a bond or treasury note, you'll make a profit when the bond matures. At maturity, the security pays its face value, and you also gain from the dividends that you receive over the bond's life. These values' combined worth exceeds the price you pay for the security, but the profit comes at a cost -- you can't spend your money while it's invested in the security, and you forgo any profit you could make from investing elsewhere. You need to know your profit from the bond to decide if it's worth the investment.

    Step 1

    Add 1 to the coupon that the bond or note offers. For example, if the security offers a coupon of 6 percent, add 1 to 0.06 to get 1.06.

    Step 2

    Raise this sum to the power of the number of periods before the security matures. For example, if the security pays dividends every year and matures after 15 years, raise 1.06 to the power of 15 to get 2.397.

    Step 3

    Multiply the result by the security's face value. For example, if you buy a $5,000 bond, multiply $5,000 by 2.397 to get $11,985.

    Step 4

    Subtract the security's price. For example, if the bond costs $7,500, subtract $7,500 from $11,985 to get $4,485. This is the profit you'll receive from investing in the security.

    About the Author

    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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