leveraged borrowing - Fixed income

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shrubaks123

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Can somebody please clear this doubt
Ri + B/E ( Ri-Borrowed rate)
I have seen so many questions where they use either entire asset value or equity value in denominator . I use appropriate value and most time i am wrong.Looks like i am lagging behind ..
Can somebody help please???
 
Simplisticaly, Return on asset is equal to the net return (return - debt return) from liabilities (that is debt/leverage) and return from equity portfolio
 
shrubaks123 wrote:
Can somebody please clear this doubt
Ri + B/E ( Ri-Borrowed rate)
I have seen so many questions where they use either entire asset value or equity value in denominator . I use appropriate value and most time i am wrong.Looks like i am lagging behind ..
Can somebody help please???
Click to expand...
I dont even use that formula when solving exercises
I think the next:
Suppose I have 20% leverage ok? so I have 120% invested in something
then my return is the following:
1.2 * Return of the portfolio - 0.2 Costs of funding. <—- I use this ( very straight forward for me)
you can change the formula as:
1*return on portfolio + .2* return on portfolio - .2* costs of funding
= return on portfolio +.2 * (return on portfolio - costs of funding)
you know you are leveraged 20% which is Borrowed / Equity invested (which is 100)
Jorge
 
It’s only the equity value in the denominator. In other words, not including the leveraged portion.
 
In CFA “Chung ” topic tests , why did they use 500 in denominator as Equity ?
 
cokemicho wrote:
shrubaks123 wrote:
Can somebody please clear this doubt
Ri + B/E ( Ri-Borrowed rate)
I have seen so many questions where they use either entire asset value or equity value in denominator . I use appropriate value and most time i am wrong.Looks like i am lagging behind ..
Can somebody help please???
Click to expand...
I dont even use that formula when solving exercises
I think the next:
Suppose I have 20% leverage ok? so I have 120% invested in something
then my return is the following:
1.2 * Return of the portfolio - 0.2 Costs of funding. <—- I use this ( very straight forward for me)
you can change the formula as:
1*return on portfolio + .2* return on portfolio - .2* costs of funding
= return on portfolio +.2 * (return on portfolio - costs of funding)
you know you are leveraged 20% which is Borrowed / Equity invested (which is 100)
Jorge
Click to expand...
I do something similar.
1) compute the total dollar return on original capital plus borrowed funds. So if i had 70 and borrowed 30, and earned 10%, the dollar return would be 10.
2) subtract the dollar borrowing cost from total earnings. So if it cost me 5% to borrow 70, I subtract 3.5.
3) divide net gains (total dollar return - dollar borrowing cost) by the original investment. Leveraged return = (10-3.5) / 70 = 9.3%
Just easier for me to think in dollar terms vs. returns
 
I don’t ever use that formula either, and I have been successful on that.
I think it is better to focus on what is actually happening. How much are you going to make on your total assets (liabilities + equity), and how much is your borrowing cost. If you know that, then you can calculate the return on equity or assets.
Jorge’s explanation is good.
 
Equity in the denominator appears in the calculation of the Duration of Equity… aren’t you mixing things up?
 
sharky7 wrote:
Equity in the denominator appears in the calculation of the Duration of Equity… aren’t you mixing things up?
Click to expand...
(E) De = (A) Da + (D) Dd
It’s really the same formula in both cases.
 
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