Total return for a mortgage-backed and asset-backed security, Financial Management

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]

Posted Date: 9/11/2012 1:49:40 AM | Location : United States







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