Leveraged Return by FOrmula

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.


this same formula can be used. Just tells you that leverage magnifies returns when the returns are higher than the interest cost, and they hit you harder when the returns are lower than the interest cost.