Total return analysis, Financial Management

A trade is assessed on the basis of its performance. Performance can be defined as the expected total return over and above the investment horizon of the trade. The returns would be from: coupon payment, the change in the value of the bond, and reinvestment income from reinvesting coupon payments and principal repayment.

For example, an investor purchases a security for Rs.1000 and expects a return of Rs.60 over a 1-year investment horizon. The expected total return is 6% (=Rs.60/Rs.1000). Suppose funds from repo markets are used to purchase securities. The interest cost is to be deducted from the total returns. For example, out of Rs.1000 investment, Rs.900 is from borrowing and only Rs.100 is from investor's own funds. Say the cost of borrowed funds is 5% that would amount to Rs.45. Now the total return would be Rs.60 - 45 = Rs.15. The total return would be 15% (=15/100).

Posted Date: 9/11/2012 1:45:15 AM | Location : United States







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