1. Real Return/Nominal Return - real return is nothing more than the nominal (gross) return adjusted for inflation. The formula reads as follows:

    Real Return = (1+Nominal Return/1+Inflation Rate) -1 x 100
In calculating the real return, one should take care to use a realistic inflation rate with which to make the adjustment.
  1. Total Return - measures the change in value, adding or subtracting any cash flows divided by the initial investment.
  2. Risk-Adjusted Return - this return is adjusted for the risk taken which enables the investor to determine whether the return was worth the risk assumed to obtain it. Please refer to the Performance Measures discussion in Chapter 7 "Portfolio Development and Analysis" for a review of the calculation methodology and rationale behind the Sharpe, Treynor, Jensen and Information ratios.
  3. Holding Period Return (single period return) - used to evaluate how quickly an investment increases or decreases in value, it is the most basic calculation, at which one arrives by dividing the change in wealth by the initial investment. The formula reads as follows:

Real Return = (1+Nominal Return/1+Inflation Rate) -1 x 100

  1. Internal Rate of Return (IRR) - the earnings rate that equates a series of cash flows to the present value of a given investment. IRR assumes that the investment's cash flows will be reinvested at the investment's internal rate of return.

HPR = Ending Value of Investment-Beginning Value of Investment +/- Cash flows/Beginning Value of Investment

  1. Yield-to-Maturity (YTM) - the internal rate of return calculation used for fixed income. One may compute it using a financial calculator that performs time value of money calculations. The inputs are as follows: PV=present value of the security. CF=the size of each cash flows for the period in question. N= the number of cash flows to be evaluated. I=the IRR for which the candidate solves using all of the foregoing inputs.
  2. Yield-to-Call (YTC) - the internal rate of return calculation used for callable bonds. The assumption is that the cash flows are reinvested at the IRR until the bond is called. One would use the same methodology for yield to maturity to calculate the yield to call.
  3. Current Yield (CY) - the dollar value of the annual coupon divided by the bond's current market value. The follow example will illustrate this:
A corporate bond is paying 8% and is selling at $1,080. Its current yield is computed as follows: $80/$1080=7.4%
Remember that the annual coupon expressed in dollar terms is the bond's percentage multiplied by its par value (.08 x $1,000=$80)

Taxable Equivalent Yield (TEY)

Related Articles
  1. Investing

    Return on Investment (ROI) Vs. Internal Rate of Return (IRR)

    Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI).
  2. Investing

    Internal Rate Of Return: An Inside Look

    Use this method to choose which project or investment is right for you.
  3. Investing

    Internal Rate of Return Formula for Excel

    The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment.
  4. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  5. Investing

    An Introduction To Capital Budgeting

    We look at three widely used valuation methods and figure out how companies justify spending.
  6. Financial Advisor

    Measure Your Portfolio's Performance

    Learn three ratios that will help you evaluate your investment returns.
  7. Investing

    How to Calculate Required Rate of Return

    The required rate of return is used by investors and corporations to evaluate investments. Find out how to calculate it.
  8. Investing

    Explaining Expected Return

    The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center