What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


How to Calculate Reinvested Bond Interest

Original post by Ryan Menezes of Demand Media

Long-term bonds present higher levels of reinvestment risk.

Investors seek bonds with high coupon rates, which offer high returns. But the bond's issuer will not offer compound interest on a bond's principal, as a fixed-rate certificate of deposit might. Instead, when a bond matures, investors must reinvest the interest at a new rate. They face what economists call reinvestment risk, the possibility that this new interest rate will not match the bond's coupon. Interest rates may, however, also rise by the bond's maturation date, offering the investor a chance to earn higher returns.

Contents

Step 1

Multiply the bond's principal by its coupon rate. For example, if you buy a bond with an issue price of $2,000 and a coupon of 4.5 percent: $2,000 × 0.045 = $90.

Step 2

Multiply the annual return by the bond's term, which is measured in years. For example, if the bond matures after three years then calculate $90 × 3 = $270.

Step 3

Multiply the sum from the previous step by the interest rate at the time of maturation. For example, if the interest rate is 1.5 percent then $270 × 0.015 = $4.05. This is the bond's reinvested interest for the first year after the initial maturation.


                   

Resources

References

About the Author

Ryan Menezes is a professional writer and blogger. He has a Bachelor of Science in journalism from Boston University and has written for the American Civil Liberties Union, the marketing firm InSegment and the project management service Assembla. He is also a member of Mensa and the American Parliamentary Debate Association.

Photo Credits

  • Thinkstock/Comstock/Getty Images


Advertisement