How to calculate Treasury bond price and yield
About this lesson
In this video, you will learn what treasury bond is and how to calculate their price and yield.
Treasury bills, notes and bonds
The US Treasury borrows by selling three kinds of securities:
| Maturity | How you earn | |
|---|---|---|
| T-bills | Up to 1 year | Bought at a discount; you get the full face value at maturity |
| T-notes | 2 to 10 years | Interest (coupons) every six months, plus face value at maturity |
| T-bonds | 20 to 30 years | Coupons every six months, plus face value at maturity |
Notes and bonds are quoted as a percentage of face value: a price of 98.5 means $985 for a $1,000 bond.
T-bill yields
A T-bill pays no interest. Your return is the gap between the price you pay and the face value.
Bank discount yield (how T-bills are quoted):
r = (Face − Price) ÷ Face × 360 ÷ n
Bond equivalent yield (comparable with other bonds):
r = (Face − Price) ÷ Price × 365 ÷ n
where n is the days to maturity.
Example
A 182-day T-bill with a $10,000 face value sells for $9,800.
- Bank discount yield = 200 ÷ 10,000 × 360 ÷ 182 = 3.96%
- Bond equivalent yield = 200 ÷ 9,800 × 365 ÷ 182 = 4.09%
The bank discount yield understates your real return, because it divides by the face value instead of the price you paid and uses a 360-day year.
Next: the price-weighted index.