The CFAI book says in the answer to 23A that return on equity is .5%. How is that so? That is the return on the bond that was purchased with leverage, so it can also be the return on equity. Can anyone shed some light on this for me?
In this case, by equity they mean the equity that you have in the investment: total value less the value borrowed. You bought bonds that returned 0.5%, so you equity portion of that investment returned 0.5%. The borrowed funds also returned 0.5% _ gross _.