Question-76: What do you mean by total return and horizon return in fixed income?

Answer: As we have seen YTM (Yield to Maturity) and YTC (Yield to call) is not a proper way of calculating the total return on Fixed Income. This is because there are many factors like Interest rate risk, re-investment risk involved and that is not considered while calculating the Yield to Maturity. If you really want to calculate total return then you must consider the return from all 3 different sources for his/her investment horizon.

Question-77: What all are things require to calculate total return on the bond?

Answer: To calculate the total return on a bond you have to consider the following

• What is the investment horizon?
• What is the re-investment rate investor would get?
• What is the selling price of a bond at the end of investment horizon?

Question-78: How does Total return differ with Yield to Maturity calculation for re-investment rate?

Answer: In case of Yield to Maturity, calculation consider the same re-investment rate as Yield-to-Maturity. But in case of Total return calculation, it considers the some assumed re-investment rate.

Question-79: Can you please explain the steps involved in computing total return for an investment horizon?

Answer: Below are the steps, which needs to be followed to calculate the total return on an investment horizon

Step-1: Assume Re-investment rate: Once you assume a re-investment rate. You can compute the total coupon payments plus (+) the interest-on-interest (which is based on the rate, which you have assumed).

Hence, you have calculated: Coupon + interest-on-interest

Step-2: Bond Sale price: We need to calculate or find the bond sale price at the end of investment horizon. And that depend on the projected yield on similar bond at the end of investment horizon.

Step-3: Calculate Total return: You need to sum both the values from above two step to calculate the total return on a bond.

Question-80: What is the issue or problem portfolio manager see, when calculate total-return instead of Yield-to-maturity?

Answer: Portfolio managers are complaining that we are assuming the re-investment rate here. Which is not good. Also, portfolio manager has to thing for specific horizon for getting the future yields. And with the YTM (Yield-to-maturity), portfolio manager does not have to assume anything.

Question-81: What other benefits a portfolio manager can see w.r.t. Total Return?

Answer: As we are assuming the re-investment rate. Portfolio manager can assume various different re-investment rates and based on that he/she can find various different scenarios to calculate the prices. And also, by investigating various scenarios portfolio manager can see how sensitive bonds performance for each individual scenario. Even he/she can assume that the re-investment rate would not be constant for entire re-investment horizon.