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


    Formula
    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:

Formula
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.

Formula
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. Financial Advisor

    Understanding Internal Rate Of Return

    Internal rate of return, or IRR, is one of the most popular methods of evaluating potential projects. Learn more about this important metric.
  3. Insights

    What's a Real Rate of Return?

    A real rate of return is an annual percentage investment return that’s adjusted for inflation, taxes or other factors.
  4. Investing

    An Introduction To Capital Budgeting

    We look at three widely used valuation methods and figure out how companies justify spending.
  5. 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.
  6. Small Business

    Calculating Net Present Value at Different Points Using Excel

    Calculating the net present value (NPV) of your investment projects using Excel.
  7. Investing

    How To Calculate Your Investment Return

    How much are your investments actually returning? Find out why the method of calculation matters.
  8. Investing

    More Ways to Evaluate Portfolio Performance

    The Jensen measure is another tool investors use to include risk when measuring portfolio performance.
  9. Investing

    What's the Rate of Return?

    Rate of return is the earnings an asset generates in excess of its initial cost. The amount is usually expressed as an annualized percentage rate. Rate of return can be calculated based on the ...
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center