Realised Returns

Definition

What are Realised Returns?

A bond’s realised return is calculated by comparing the initial investment’s value with its final value. Interest earned, discounts accreted, and premiums amortised, plus any gains or losses realised throughout the month, less all fees, are divided by the average daily balance over the reporting period to get the realised rate of return. After that, the realised return should be annualised.

Example of Realised Returns:

To take a simple example,

Suppose a bond is bought for USD 98 immediately after a coupon payment date. It earns a coupon of USD 1.75 in six months and is worth 98.5 at that time. The capital gain from the increase in the bond’s price is USD 0.5 (= 98.5 – 98.0). The realised return from the bond over six months is therefore

$ \frac{98.5-98+1.75}{98.0}=0.02296 $

This is 4.592% (= 2 X 2.296%) per annum with semi-annual compounding.

Why are Realised Returns important?

Investors can use realised yield to cope with some high-yield bonds virtually invariably default. Because of defaults, a high-yield bond fund’s realised yield is likely lower than its yield to maturity.