The total return in case of mortgage-backed and asset-backed securities depend on the projected principal repayment and the interest earned on reinvestment of the projected interest payments and projected principal payments. A prepayment rate over the investment horizon is assumed to calculate the total future returns.
In case of mortgage-backed and asset-backed securities that make monthly payments, the monthly total returns are calculated as follows.
Monthly total returns = (Total future returns/full price)^{ 1/no. of months in horizon - 1}
The bond-equivalent annual return can be calculated using the following formula.
Bond-equivalent annual return = 2[(1+ Monthly total return)^{ 6} - 1]