you buy $10MM of a corporate bond. you finance 70% of the purchase with repo with a rate of 6% per annum. 30 days later, the bond has increased 1% in value (assume this captures accrued interest so it’s a total return for the period). compute the 30-day rate of return on the equity and borrowed components of the portfolio… thanks in advance!! … this is basically inspired by a CFA end of chapter question… wondering if i don’t understand or if it’s an errata item… EDIT: ok, it’s not errata item. just a very strange way to look at a problem (i think, at least)
My guess is: 1% of 10M = 100k, this is the portfolio return 6% p.a. is 1/2 % per month (roughly); 1/2 % of 7M = 35k So, in total, you have gained 100k - 35k = 65k. Compared with the equity investment of 3M, this equates to a return of 65k / 3M = 2.167% over the holding period of 30 days. Is that correct? What does the EOC solution say?
Two ways you could accomplish this: Return = Return on Portfolio + [(Borrowed/Equity) x (Return on Portfolio - Cost of Funds)] Re = Rp + [(B/E) x (Rp-Rc)] Re = 1% + [(7MM/3MM) x (1%-6%/12)] Re = 1% + 1.17% Re = 2.17% or Return on Portfolio: 10MM x 1%= 100,000 Less Cost of Funds: 7MM x (6%/12) =35,000 Net Return: 65,000 Equity: 3MM Re = 2.17%
VA is going to crush this thing.
your both wrong as per the answer… i was wrong too
I stand by my statement.
I stand by my answer. So what does the text say?
here’s what i got and i’m sure it’ll be the same as further up answers… you made 1% or $100K on the 10M… you paid 0.5% on the 7M, so 35K so you made 65K on 3m… so you made 2.167%… so i’m in agreement… but we’re wrong
Ok - so whats the real answer?
text basically says… your equity is $3M. you made 1% on that… your borrowed portion was $7M. you made 1% minus 0.5% on that portion, so 0.5%… the next question was about portfolio return, which is how we calc’d it. i don’t think i was being tricky not putting the next question, because they might just ask it the first way on the exam. and it’s just very, very strange they way they ask some things. very weird… and the cfa calculation questions are giving me quite alot of definitional troubles from reading schweser. it’s like i know how to do things, but don’t know what they’re asking for. so just be warned… i’ll post any others i come across
ValueAddict Wrote: > Re = Rp + [(B/E) x (Rp-Rc)] > > Re = 1% + [(7MM/3MM) x (1%-6%/12)] > Re = 1% + 1.17% So the CFAI question “compute the 30-day rate of return on the equity and borrowed components of the portfolio…” refered to two terms of VA’s equation?
old_akakaraka Wrote: ------------------------------------------------------- > ValueAddict Wrote: > > Re = Rp + [(B/E) x (Rp-Rc)] > > > > Re = 1% + [(7MM/3MM) x (1%-6%/12)] > > Re = 1% + 1.17% > > So the CFAI question > “compute the 30-day rate of return on the equity > and borrowed components of the portfolio…” > refered to two terms of VA’s equation? yes… but i’m don’t think any answer has come close to the two terms they were looking for… i think we all agree and know how to do this calculation and many others. it’s just the wording that makes you pull your hair out.