Calculate the Annualized Rate of Return for a Fixed Income Portfolio
An investor's return on a bond, which is a fixed-income investment, is a function of the bond's interest rate, or coupon, and its price. The return on a fixed-income portfolio is the weighted average of the returns on all of the bond investments in the portfolio.
Instructions
Steps
1. For each bond in the portfolio, determine the price appreciation. For example, if the investor originally paid $96 for a $100 bond, and that bond is now worth $98, then the price appreciation in the year is $2 per bond.
2. Calculate the coupon interest for each bond. If the $100 bond has an annual coupon of 5 percent, then it pays $5 cash in interest each year.
3. Divide the cash interest amount and the price appreciation amount into the original price paid. For example, $5 plus $2 equals $7; $7 divided by $96 equals 7.29 percent.
4. Repeat steps 1 through 3 for each bond in the portfolio.
5. Make a column on paper of each bond's annual return. Next to that column make a list of the amount paid for each bond next to its return. In a third column, multiply the return times the dollar amount.
6. Add up columns two and three. Divide the sum of column two into the sum of column three. This result expressed as a percentage is the weighted average return in one year on the fixed-income portfolio.
