When you buy a U.S. Treasury bond, it helps to know how long your money will be tied up. You can calculate a Treasury bond’s payback period to determine the number of years it will take to recoup your initial investment through the bond’s interest payments and principal repayment. Expect to park your cash in a Treasury bond for a while. Investors typically buy these bonds for safety and security rather than quick riches. Treasury bonds pay lower interest than more risky investments and take up to 30 years to mature, or repay their face value.
Multiply the Treasury bond’s coupon, or interest, rate by its par value to determine the total annual interest it pays. The par value is the price the bond repays on its maturity date. For example, assume you bought a Treasury bond with a $1,000 par value and a 6 percent coupon rate. Multiply 6 percent, or 0.06, by $1,000 to get $60 in total annual interest.
Divide the price you paid for the Treasury bond by its total annual interest. A bond’s price might differ from its par value due to market interest rate fluctuations. In this example, assume you paid $990 for the Treasury bond. Divide $990 by $60 to get 16.5.
Check if your result is less than the number of years until the bond matures. If so, your result is the bond’s payback period in years. If your result is greater than or equal to the number of years until maturity, the number of years until maturity is your payback period. Continuing the example, assume the bond matures in 30 years. Because 16.5 is less than 30, the bond’s payback period is 16.5 years. The bond has a high enough coupon rate to pay you back your initial investment through its interest payments in 16.5 years, which occurs before its maturity.
- When a Treasury bond’s payback period equals the years it has until maturity, you’ll get back some of your investment through interest payments and the rest through the principal repayment.
- The payback period formula uses annual interest to figure the payback period in years, but you can divide the total annual interest by 2 to figure the semiannual interest a Treasury bond actually pays. For example, a Treasury bond that pays $60 in annual interest would make two $30 semiannual interest payments.
- Accounting Tools: Payback Method, Payback Period Formula
- Securities Industry and Financial Markets Association: Types of Bonds -- About Bills, Notes and Bonds
- State University of New York at Oswego: Chapter Six -- Bonds, Bond Prices and the Determination of Interest Rates, Part One
- Securities Industry and Financial Markets Association: Types of Bonds -- Understanding Price and Yield Information