LEveraged Return by formula = Asset Return + (Debt/Total Assets) (Asset Return - Cost of Debt).
I’m looking at a quesiton below: Use of Repo agreements.
A manager with $2 million of funds to invest purchases corporate bonds with a MV of $7 million.
TO partially finance the manager, enters into a 30 day repo agreement with the bond dealer for $5 million. The 30 day temr repo rate is assumed to be 4.2% per year. At the end of the 30 days, when the transaction expires, the corporate bonds are assumed to have increased in value by 0.3%.
What is the 30 day rate of return on the hypothetial leveraged portfolio of corporate bondss?
Can you use the original formula i typed out?
4.2%/12 = 0.35%. The cost to borrow is higher than the increase in value of the croporate bonds. which is 0.3%. This is not good. so you know the return will be less than 0.3%, since you need to repay the debt.