Total Return

• 1). Compute the total return, which is the sum of all cash flows from the principal and interest of the bond. This means the value of income from cash dividends earned plus the difference in the market value of the bond during the period being measured. Include all accrued interest (i.e., interest earned but not yet paid) as well. Divide the sum of interest and capital gains by the value of the bond at the beginning of the time period. For example, a bond that costs $1,000 is worth $1,020 a year later. Therefore, the accrued interest on the bond is $60. The total return on the bond is $20, plus $60 or $80. Eighty dollars divided by $1,000 equals an eight percent total return.
  
  
• 2). Divide the annual coupon income by the market value of the bond. The resulting value is the current income. Current income approximates the yield to maturity of the bond. Premium bonds (bonds priced higher than maturity value, or par) have a slightly lower yield. Discount bonds, i.e., bonds priced below par, have a slightly higher yield than the current return. Current return changes as interest rates change.
  
  
• 3). Use yield spreads as a measure of the bond's relative value. For bondholders other than Treasury bondholders, investors should note the difference in bond values compared to similar maturity Treasury issues. This spread measurement will vary greatly over time and give the investor a view of the relative attractiveness of the bonds he owns. Historical spread relationships are archived and available through brokerage houses and other financial institutions.
  
  
• 4). Measure the bond maturity risk of ascending maturities. Subtract the yield of a bond from similar bonds of shorter and longer maturities. Interest rate volatility, or price fluctuations in bond prices, increases at a faster rate as maturity increases. Volatility is also a function of the increasing difference between maturity and an extraordinary redemption rate. Individual investors who do not trade bonds should not consider bond purchases beyond 10 years or the date of a bond's extraordinary redemption, or call, feature.
  
  
• 5). Measure the value of a bond's future performance by reviewing the credit rating of the security. Bond ratings are subject to change over time, depending on the issuer's circumstances and the security backing the bond. Note long term trends in the industry that may affect the particular bond that you own. Major bond rating services issue credit reviews that can usually be accessed through public libraries or financial institutions.