- 1). Determine your initial investment amount, the year in which the bond was purchased, the interest rate for the bond and the cash flow received annually as a result of the investment. This information is listed on the actual paper bond or can be viewed online by logging into your account for bonds that have been purchased electronically.
- 2). Use the formula P = Y + U/CF to calculate the time it will take to recover your initial investment in the treasury bond. This formula solves for P, which represents the payback period; assuming that data is known for Y, the number of years the investment has been held; U, the unrecovered portion of the investment; and CF, the cash flow from the investment.
- 3). Insert the figures from Step 1 into the formula listed in Step 2 to calculate the payback period. For example, assume the initial investment is $100,000 and you have held the treasury bond for three years during which period you have received the following cash flow amounts: $15,000 during the first year, $20,000 during the second year and $30,000 during the third year. Cash flow at the end of the fourth year will be $35,000. So, Y = 3, U = 100,000 - ($15,000 + $20,000 + $30,000) = $35,000, and CF = $35,000. Using the formula then, P = 3 + $35,000/$35,000 = 4. Your initial investment amount will be recovered after four years, therefore four years is the payback period.
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