When you buy a bond, you are actually lending your money to the government or corporation that originally sold the bond. Bonds usually pay good interest rates compared to money market accounts or even certificates of deposit, and the interest is guaranteed until the time the bond must be paid off (called the maturity). That’s why you and other investors by bonds. Finding the interest rate on a bond isn’t quite as simple as you might think because bond prices vary.
Examine the bond certificate. Make a note of the bond’s face (or par) value and the coupon rate. Face value is the amount the company or government that issued the bond must give the bond owner at maturity to pay off the debt represented by the bond. The coupon rate (sometimes called the stated rate) is the amount of interest the bond pays each year.
Multiply the coupon rate by the face value if the coupon rate is listed as a percentage. For example, a bond with a face value of $5,000 and a coupon rate of 6 percent pays a coupon rate of $300 per year. Sometimes the coupon rate is stated in dollars. If so, you can skip this step.
Look up the price you paid for the bond in your financial records. Divide the coupon rate in dollars by the purchase price of the bond and multiply the result by 100 to convert to a percentage interest rate. Suppose you paid $4,500 for a bond with face value of $5,000 and a coupon rate of $300. You have ($300/$4,500) * 100 = 6.67 percent. So 6.67 percent is the actual interest rate you are earning. This actual interest rate is called the yield.
Calculate the yield of a bond you are considering as an investment. Follow the same steps, except use the bond’s current market price. If a bond is not listed in the newspaper or on a listing service like Yahoo Finance Bond Center, ask your broker for the current price information.
Items you will need
- Bond certificate
- Investment records
- Bond prices listed by newspapers or online services are usually expressed as a percentage of the bond’s face value. To convert to dollars for the purpose of finding the yield, just multiply the percentage price listed by the face value of the bond.