How do I calculate the return on a bond?
Answers | 1
The second element in bond return is capital gain or loss. Bonds fluctuate in value, just like stocks, so your bond can gain or lose value during the time you hold it. Bond values move in the opposite direction of interest rates. So if interest rates go down during the period of time you hold the bond, its value goes up. If rates go up, your bond loses value if you were to sell it in the open marketplace. However, if you hold any bond to maturity, and the bond issuer remains solvent, you will get the face value back upon maturity.
By adding the interest rate return you garner from the bond during the period you hold it, to any capital gain or loss realized upon sale of the bond, you will have determined your total return.