Understanding Bond Fund Appraisal: A Comprehensive Guide

While there are many types of bond funds, the main concept behind them is the same. By purchasing a bond, you are actually buying your way into a fund. Bonds have fixed interest rates per annum, which determine the total amount of dividend you will receive after the bond matures.  The interest rate, taxation policies on the interest and bond maturation depend on the type of bond that you buy and the borrowing (issuing) authority. To find out how much your bond has grown, follow the steps given below.

Step 1–Finding Out the Interest Rate for Your Bond

Information regarding a bond's interest rate can be found out from the issuing authority. You can call your bank to find out the interest rate in case you bought your bond from a bank. Be aware of the fact that the interest rate can change after a number of years under bank policy because you will have to incorporate this information in the calculations that are to follow this step. Do not purchase a bond if you think the numbers don’t add up in your favor.  

Step 2–A Useful Mathematical Formula

You can use this formula to calculate the amount of interest that adds on to the principal amount per annum.
                                             I = PRT/100
•    I stands for the amount of interest in dollars, for instance.
•    P stands for principal amount; this is the initial investment you made to purchase the bond.
•    R stands for the interest rate per annum.
•    T stands for time in years for which you need to calculate the value of the bond.

Step 3–Calculating the Interest

Put in the concerned values in the formula given above to find out the interest you get per year. Take note that you will have to use this formula separately for periods with different rates. Period here means the time frame for which the rate is fixed by the issuing authority. An example is given below

Principal: $200
Rate: 15 percent
Time: 3 years
Interest = PRT/100  
                     200 x 15 x 3/100
Interest = $90
After you have calculated the interest for different periods, move onto the next step.

Step 4–Calculating the Final Value of the Bond

It is useful to have a paper and pencil to write down the interest corresponding to different periods. Calculate the total interest by adding the individual values for different periods. Note this value and add to the principal value to find out the current value of the bond. Also note that while some bonds are tax free, others are not. This tax is deducted from the final value of the bond as per the policy of the issuing authority. Bonds in general have a maturation period. This is the time period after which you can have access to the money that you gained via interest on that bond. The maturity period is typically 10 to 30 years depending on the type of bond.