# How to Calculate the Annual Rate of Return on a Bond

A bond's annual rate of return represents the profit you've earned on it during the year. It's expressed in a percentage format. If you know your bond's coupon rate, its value during the year and the annual inflation rate, you can calculate both the nominal rate of return and the real rate of return you earned on a bond.

## Annual Nominal Rate of Return

The nominal rate of return represents the actual rate of profit you earned on a bond during the year. Calculating it involves three steps.

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1. Determine how much interest you earned on the bond during the year by multiplying its face value by its coupon rate. For example, if you have a \$1,000 bond with a coupon rate of 4 percent, you'd earn \$40 in interest each year.
2. Calculate how much the value of the bond appreciated during the year. Look at how much the bond was selling for on January 1, the beginning of the year, on a bond market. Check its price again on December 31 of the same year. For example, if the bond was selling for \$1,000 on January 1 and \$1,030 on December 31, the annual appreciation for the calendar year is \$30.
3. Add the interest earned to the price appreciation and divide it by the bond's price at the beginning of the year. In our example, that would be \$40 in interest plus \$30 in appreciation -- or \$70 -- divided by the beginning price of the bond -- \$1,000 -- for a 7 percent annual rate of return.