When you invest in a bond, you play the role of a banker by lending money to the issuer of the bond. In exchange, the issuer agrees to pay you interest, and to repay the principal amount when the bond matures. The cash interest payments are typically fixed and come every six months or at some other interval. A bond issuer might be a corporation, the U.S. government, or your hometown government. You can calculate the total interest a bond pays over its life to see how much you’d reap if you buy it when it’s first issued and hold until it matures.
Step 1
Find out a bond’s annual "coupon rate" -- meaning the interest rate -- Its face value, and the number of years it takes for it to mature from your broker. For example, assume a 20-year bond has a $1,000 face value and a 5.5 percent annual coupon rate.
Step 2
Divide the annual coupon rate by the number of interest payments the bond makes per year to figure the periodic interest rate. In this example, assume the bond pays interest semiannually. Divide 5.5 percent, or 0.055, by 2 to get 0.0275.
Step 3
Multiply the periodic interest rate by the bond’s face value to figure the dollar amount of each interest payment. In this example, multiply 0.0275 by $1,000 to get $27.50 for each payment.
Step 4
Multiply the number of years it takes for the bond to mature by the number of payments it makes per year to determine the total number of interest payments it makes over its life. In this example, multiply 20 by 2 to get 40 total interest payments.
Step 5
Multiply the total number of interest payments by the amount of each payment to determine the total cash interest paid over the life of the bond. Concluding the example, multiply $27.50 by 40 to get $1,100 in total interest paid over the life of the bond. You’ll also receive the $1,000 repayment of its face value when it matures.
References
Tips
- If you buy a bond after it is first issued or sell it before it matures, the total interest you receive will be less than the total amount it pays over its life.