# How to Calculate Return on U.S. Treasury Bonds

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The concept of return on investment is fundamental to money management. By comparing what you put in versus what you get back, you can easily compare performance across your portfolio. There are several ways to measure your return and we'll use U.S. Treasury bonds as an example for our calculations. They're considered one of the safest investments because they're backed by the full faith and credit of the U.S. government. These bonds can be purchased directly from the Treasury during its regular auctions or on the secondary market.

## Capital Appreciation

The first component of a Treasury bond's return is its capital appreciation or depreciation. Treasury bonds are actively traded on the secondary market and their price fluctuates daily. Say that you buy a 30-year Treasury bond issued on February 15, 2013, and maturing on February 15, 2033. You pay a purchase price of \$98.00. Now let's say that you you hold the bond for exactly one year and sell it on the secondary market on February 15, 2014 for \$99.96. From capital appreciation alone you'd have realized gain of \$1.96, an annualized investment return of 2 percent.

## Compound Interest

The second component of a Treasury bond's return is compound interest. Treasury bonds pay interest semi-annually based on a stated rate called a coupon rate. Say that the coupon rate on the 30-year Treasury bond example discussed earlier is 5 percent. That means that for every \$100 of bonds investors receive \$2.50 every six months, an annual return of \$5. However, the compound return is actually sightly higher than the coupon rate because investors can re-invest the \$2.50 received in the first six months and earn \$2.625 (\$2.50 x 1.05) over the course of the year on that payout. Adding this amount to the \$2.50 owed to them at the end of the 12 months, investors earn a total of \$5.125. Therefore, the annualized investment return from compounded interest payments is 5.125 percent. If we sum up the return from capital appreciation (2 percent) with the return from interest and compounding (5.125 percent), we find that the Treasury bond's total return was 7.125 percent.