Beginner's guide to U.S. Treasury Bonds
How to calculate U.S. Treasury bond yields and fees?
In the previous video"Beginners Must See: These 3 Factors for Selecting US Bonds"we briefly introduced US Bonds and how to filter and Trade them.
However, in actual trading, many people have questions about how to calculate the returns and costs of US Bonds. This video will discuss these two issues.
1. How to calculate US bond returns?
Some might think: this question is simple, the return is: coupon rate x principal x holding period. Assuming an investment of $1000 principal to Buy US bonds and Hold for 3 years, with a coupon rate of 5%, then the return after 3 years would be $150.
At first glance, this seems correct, but it actually overlooks a practical issue that arises in trading: in most cases, the buying and selling prices do not equal the face value of the Bonds.
Therefore, the returns from investing in US Bonds, in addition to coupon income, also need to account for capital gains, which is the difference between buying and selling prices.
Assuming you bought 100 bonds of 2.5% USA Treasury at a price of $97.5. The bonds mature in 3 years, and after holding them for 2 years, you sold them at a price of $99. (Typically, the face value of a USA Treasury bond is $100.)
If the bonds pay interest semi-annually, then on each interest payment date, you would receive $125. After 2 years, the total interest income would amount to $500. The buy-sell difference is $150, resulting in a total profit of $650.
But what if you Hold until maturity? At maturity, the USA Treasury in the Account would be redeemed, the principal would be settled according to the face value of the bonds, the capital gain would be $250, plus the interest income, totaling $1000.
However, it is important to note that the price of USA Treasuries fluctuates daily; if you wish to obtain low-risk stable returns, you can choose to Hold until maturity.
2. How to quickly calculate USA Treasury returns on FutuBull?
If you find manual calculations troublesome, you can quickly calculate the returns on different USA Treasuries using the "Bond Yield Calculator" on FutuBull.
1. Open the FutuBull app, click on "Wealth Management," and select "Bonds."
2. Click to enter the 'Bonds Yield Calculator'.
3. In the 'Yield Calculator' section, click to change the bonds.
4. You can filter the desired US bonds to buy based on four aspects: remaining term, yield to maturity, coupon rate, and whether it supports rapid trading.
5. After selection, fill in the purchase face value, and then press 'Calculate'. Estimated returns if held to maturity, as well as the time of each coupon payment and the accumulated amount will be provided.
6. The time and price of buying and selling can also be edited, allowing you to see changes in returns under different holding times and buying and selling prices.
Three, what costs are involved in investing in US bonds?
There are two scenarios for trading US bonds: the first is holding them until maturity after purchase; the second is buying, holding for a period, and then selling. Each corresponds to different types of costs.
1. Buy & Sell: Transaction fee.
When buying and selling US Bonds, brokerages need to charge trading fees. Taking Futu as an example, the trading fees mainly consist of commissions and platform usage fees.
The commission for US Treasury bonds is the transaction face value x 0.08%. The platform usage fee is the transaction face value x 0.04%, with a minimum of $2 and a maximum of $15.
Assuming you bought $10,000 face value of US Bonds, then $12 will be charged as trading fee when buying and selling.
2. While Holding: Custody Fees
Furthermore, when holding bonds, brokerages usually also charge custody fees. Unlike trading fees, custody fees are calculated based on the daily Market Cap of the held bonds.
Taking Futu as an example, the custody fee is calculated as daily Market Cap x 0.08% ÷ 365. The custody fee is frozen daily and will be deducted in one go at the beginning of the next month.
Assuming the Market Cap of the US Bonds you currently hold is $9900, then the custody fee for holding it for one day is about 2 cents.
In simple terms, if you Buy US Bonds and hold them until maturity, then you only need to pay one Trade fee and the custody fees during the holding period; if you sell after holding for a while, you will need to pay two Trade fees and the custody fees during the holding period.
That's all for this video. If you liked this content, feel free to give us a like or leave a comment. Thank you for watching.
