How to Calculate Payback Period for a Treasury Bond
Treasury bonds are fixed-rate debt securities issued by the United States government through the Bureau of the Public Debt. T-Bonds are generally offered in $100 increments with a $1,000 minimum and have a 30-year maturity period. While a bondholder cannot redeem a treasury bond that has not yet matured, it can be sold to another buyer. Because of this provision, it may be helpful to calculate the payback period for the bond to determine at which point you will have recovered your initial investment so that you can sell without a loss.
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Instructions
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1
Determine your initial investment amount, the year in which the bond was purchased, the interest rate for the bond and the cash flow received annually as a result of the investment. This information is listed on the actual paper bond or can be viewed online by logging into your account for bonds that have been purchased electronically.
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2
Use the formula P = Y + U/CF to calculate the time it will take to recover your initial investment in the treasury bond. This formula solves for P, which represents the payback period; assuming that data is known for Y, the number of years the investment has been held; U, the unrecovered portion of the investment; and CF, the cash flow from the investment.
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3
Insert the figures from Step 1 into the formula listed in Step 2 to calculate the payback period. For example, assume the initial investment is $100,000 and you have held the treasury bond for three years during which period you have received the following cash flow amounts: $15,000 during the first year, $20,000 during the second year and $30,000 during the third year. Cash flow at the end of the fourth year will be $35,000. So, Y = 3, U = 100,000 - ($15,000 + $20,000 + $30,000) = $35,000, and CF = $35,000. Using the formula then, P = 3 + $35,000/$35,000 = 4. Your initial investment amount will be recovered after four years, therefore four years is the payback period.
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