How to Calculate Bond Repayment

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Bonds are contracts between issuers and buyers.
Bonds are contracts between issuers and buyers. (Image: savings bonds image by judwick from Fotolia.com)

With any investment, investors usually have a goal for the individual investment in terms of profit or income they will receive from that investment. Unlike investing in equities, where there is no guarantee on either the principal or any potential investment returns, when you invest in bonds you can calculate exactly how much you will earn provided you hold the bond till maturity. Bonds are contracts between the issuer and the purchaser, and provided that the issuing company or government does not file for bankruptcy, you will receive a guaranteed rate of return.

Determine the interest rate for the bond, also called the coupon rate. When bonds were issued in paper form, they included coupons, which you would remove as they matured and present to the bond issuer, who would then pay the amount of interest printed on the coupon.

Find out the number of times the bond makes interest payments. In most cases, bonds make semiannual (twice a year) payments, but some bonds pay interest only once a year. Your stock broker will be able to tell you the number of times per year the bond will make payments. You can also contact the investor relations department of the company or government who issued the bond to get that information.

Calculate the amount of periodic interest. If your bond pays interest semiannually at a 6 percent coupon rate, you multiply 6 percent by the face value of the bond, which is usually $1,000, and divide that amount by two to reflect the two payments to be made during the year (0.06 x $1,000 / 2 = $30).

Calculate the bond repayment for the entire term of the bond. If you have a 10-year semiannual bond with a 6 percent coupon rate, the formula is 0.06 x $1,000 x 10 = $600. Add this to the face value of the bond (the original $1,000 you invested). Your total bond repayment would be $1,600 for the ten years.

Tips & Warnings

  • While this return is the true return of your investment, it does not take into account the effect inflation has on your return. If inflation grew 1 percent the first year of your investment, your true rate of return that year would be 5 percent, reflecting the loss of purchasing power over that time period.

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