A Treasury bond yield is the yield to maturity of a bond issued by the United States Treasury. The yield to maturity of a bond is the implied interest rate by which the promised cash flows from a bond are discounted. The Treasury bond yield is interesting to investors because it provides a clearer picture of expectations than do the yields to maturity on corporate bonds. While the values of all corporate bonds incorporate some level of default risk, the Treasury is assumed to be 100 percent credible.
A bond is a debt instrument. The issuing entity receives the price the investor pays for the bond; in exchange, it promises to pay some amount at the bond’s maturity date. Sometimes, the bond contract also specifies that the issuer will pay periodic coupons, which are essentially interest payments on the debt. The Treasury issues a range of securities. Treasury bonds are securities that mature 30 years after the issuing date and pay coupons every six months.
A Treasury bond yield is calculated in the same way that the yield for any bond is calculated. The formula is given by Price = C/(1+y) + C/(1+y)2 + … + C/(1+y)T-1 + (C + Par)/(1+y)T. The price is the market price of the bond. C is the coupon of the bond, or the payment that the investor receives each period. The par value, or face value, is the final payment of the bond, which is usually $1,000 US Dollars (USD), and T is the number of periods left until the bond matures.
In the formula above, y stands for the yield to maturity of the bond. The other components of the formula are all known quantities. Once they are filled in, the yield to maturity may be found using the guess and check method: you guess what the yield might be, compare the predicted price of the formula to the actual price, adjust the yield up or down as needed, and try again. This method is time-consuming, so most investors use financial calculators to find bond yields. These calculators also use the guess and check method, but they iterate the trials quickly to give a precise answer.
Treasury bonds are stable, reliable notes, so they are used as benchmarks in discussions of financial factors. Investors often refer to the Treasury bond yield curve, a graph of the yield to maturity of Treasury bonds with different maturation dates. The shape of this graph illustrates the expectations of future interest rates that prevail in the market.
