Total/Book Return: The Good, The Bad & The Ugly - GIOA
Total/Book Return: The Good, The Bad & The Ugly Rick Phillips Rick.Phillips@ftnmainstreet.com President, FTN Main Street Advisors Kevin Webb, CFA Kevin.p.webb@pjc.com Piper Jaffray
Total/Book Return: The Good, The Bad & The Ugly Agenda Big Picture Total/Book Return The Good The Bad The Ugly
Total/Book Return: The Good, The Bad & The Ugly Agenda Big Picture – Philosophy, Strategy & Tactics
The Big Picture: Philosophy, Strategy & Tactics Sleep-Adusted returns via Suitability Benchmark using evidence based methods. Philosophy A plan of action or policy to achieve one or more goals (e.g., demonstrate good stewardship via a suitability benchmark). Investment philsophy is a coherent way of thinking about the markets, risk, return, investor behaviour, etc. Resources, skills & methods used to achieve the goal of a strategy (e.g., education, formulas, data, software, etc.) Tactics Strategy The intersection of philosophy, strategy & tactics is the world of portfolio management The difference between strategy and tactics: Strategy is done above the shoulders, Tactics are done below the shoulders. Designed and created by Kevin Webb, CFA
What Should I Benchmark? Prudent Person Investments shall be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. Prudent Investor A U.S. law that sets the standard of fiduciary duty for those entrusted with the responsibility of managing others' money, such as trustees and estate administrators. It requires that a trustee weigh risk versus reward when making investment decisions, taking into account the income that may be generated by the investment as well as the probable safety of the invested capital. Prudent Investor vs Prudent Man/Person 1. Trust accounts are judged on their entire portfolio, rather than whether the investment was prudent at the time of purchase. 2. Diversification is explicitly required under the Prudent Investor Act 3. Suitability is deemed more important than individual investments 4. Fiduciaries are allowed to delegate investment management to qualified third parties tor-rule.asp & e.asp
What Should I Benchmark? General Objectives “The primary objectives, in priority order. 1. Safety Safety of principal is the foremost objective The goal will be to mitigate credit risk and interest rate risk. 2. Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. 3. Return The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints of safety and liquidity needs.” GFOA Sample Investment Policy, accessed 03/17/18, pages 1-2. Emphasis added. InvestmentPolicy.pdf
CFA Institute: Characteristics of Useful Performance Benchmarks A benchmark is a collection of securities or risk factors and associated weights that represents the persistent and prominent investment characteristics of a manager's investment process. A benchmark should be: Unambiguous: The identities and weights of securities constituting the benchmark are clearly defined. Investable: It is possible to forgo active management and simply hold the benchmark. Measurable: The benchmark's return is readily calculable on a reasonably frequent basis. Appropriate: The benchmark is consistent with the manager's investment style and sectors. Specified in Advance: The benchmark is specified prior to the start of an evaluation period and known to all interested parties. “The failure of a benchmark to possess these properties compromises its utility as an effective investment management tool. The properties listed merely formalize intuitive notions of what constitutes a fair and relevant performance comparison. It is interesting to observe that a number of commonly used benchmarks fail to satisfy these properties.” CFA Institute Seven Habits of Highly Effective Investment Programs by Rick Phillips, FTN Main Street Advisors, Kevin Webb, CFA, Piper Jaffray
Benchmark Suitability Designed and created by Kevin Webb, CFA
Benchmark Suitability Primary Liquidity (Versus 0-3M Target 15%) 12% 15% Secondary Liquidity (Versus 3-12M Target 15%) 15% Total Liquidity (Versus 0-12M Target 30%) 30% 30% Effective Duration (Versus Target 2.00) 18% 2.1 2.0 Moody's Composite Credit Rating (Versus Target Aa2) Aa2 Total Credit Exposure (Versus Target 30%) 30% 30% FYTD Book Rate Rate of Return (Versus Benchmark) Book Yield (Versus Benchmark) Aa1 2.1 1.7% 2.3 1.9% 12 Month Total Rate Rate of Return (Versus Benchmark) 2.9 2.5% Designed and created by Rick Phillips (President, FTN Main Street Advisors)
Definitions “Knowledge is knowing a tomato is a fruit; Wisdom is not putting it in a fruit salad.” Brandreth, Gyles. Oxford Dictionary of Humorous Quotations (Kindle Location 4265). OUP Oxford. Kindle Edition. See this useful Microsoft Help page for Microsoft Word on the definition/history of “Lorem Ipsum Dolor Sit Amet Etiam”: https://support.microsoft.com/en-us/kb/114222
Risk Defined More things can happen than will happen. It has been philosophically defined by finance professor Elroy Dimson of London Business School this way: “Risk means more things can happen than will happen.” In the end, risk is the gap between what investors think they know and what they end up learning— about their investments, about the financial markets, and about themselves. Zweig, Jason. The Devil's Financial Dictionary (p. 182). PublicAffairs. Kindle Edition. Emphasis added.
Risk & Return are Related Finding the right trade-off is the key *The scientist who developed the Saturn 5 rocket that launched the first Apollo mission to the moon put it this way: "You want a valve that doesn't leak and you try everything possible to develop one. But the real world provides you with a leaky valve. You have to determine how much leaking you can tolerate." (Obituary of Arthur Rudolph, in The New York Times, January 3, 1996.) Peter L. Bernstein. Against the Gods: The Remarkable Story of Risk (Kindle Locations 69-71). Kindle Edition. Emphasis added.
Total/Book Return: The Good, The Bad & The Ugly Agenda Big Picture – Philosophy, Strategy & Tactics Total/Book Return – What’s the difference?
Why do we use Return instead of ? “A rate of return is the gain received from an investment over a period of time expressed as a percentage. Returns are a ratio relating how much was gained given how much was risked. There are several reasons that returns have emerged as the preferred statistic for summarizing investment performance: *The rate of return concentrates a lot of information into a single statistic. . *This single number, the return, is a ratio. It is faster for an investor to analyze proportions than absolute numbers. . *Returns are comparable even if the underlying figures are not. . *Returns calculated for different periods are comparable; that is, an investor can compare this year's return to last year’s. *The interpretation of the rate of return is intuitive. Return is the value reconciling the beginning investment value to the ending value over the time period we are measuring. “ The Theory and Practice of Investment Management (Frank J. Fabozzi Series) (Kindle Locations 1180-1189). Kindle Edition. Emphasis added.
Total/Book Return Defined Price Income Income Seven Habits of Highly Effective Investment Programs by Rick Phillips, FTN Main Street Advisors, Kevin Webb, CFA, Piper Jaffray
Total Return: The Good, The Bad & The Ugly Agenda Big Picture – Philosophy, Strategy & Tactics Total/Book Return – What’s the difference? The Good – Risk Management Framework
Yield Curve(s): 12/31/99 vs 08/31/19 12/31/1999 3Mo CMT 2Yr 3Yr 5Yr 7Yr 10Yr 30Yr Spread(bp) 3Mo CMT 200 6.0 150 5.0 100 4.0 50 3.0 Jun-16 Sep-15 Dec-14 Mar-14 Jun-13 Sep-12 Dec-11 Mar-11 Jun-10 Sep-09 Dec-08 Mar-08 (100) Jun-07 0.0 Sep-06 (50) Dec-05 1.0 Mar-05 0 Jun-04 2.0 3Mo CMT 2Yr CMT 250 2Yr CMT 7.0 Sep-03 3.0 3Mo 6Mo 1Yr 8.0 Dec-02 0 (100) (200) (300) (400) (500) (600) 4.0 2.0 Yld Change Mar-02 Yield To Maturity 5.0 2Yr CMT vs 3Mo CMT Avg Spread: 46 Jun-01 6.0 Sep-00 2Yr CMT 30Yr CMT 5Yr CMT Dec-99 7.0 8/31/2019 30Yr CMT 5Yr CMT 1.0 0.0 0.0 5.0 10.0 15.0 20.0 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 25.0
Strategy Webb Yield Curve Perspective: Dec-99 to Aug-19 7.0 6.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 5.0 4.0 3.0 2.0 1.0 0.0 0.0 -1.0 1.0 -2.0 2.0 -3.0 3.0 -4.0 4.0 -5.0 5.0 -6.0 6.0 -7.0 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 2016 2017 2018
Main Street Ratio (Yield/Duration): 12/00 to 08/19 20.00 0.30 18.00 16.00 0.25 0.25 0.24 17.6 0.25 0.22 14.00 Average Edur 0.20 Average Ytw 12.00 Main Street Ratio 0.14 10.00 0.15 8.5 8.00 0.10 6.00 4.6 4.00 2.8 2.00 0.00 1.4 1.9 1.9 2.1 2.6 3.3 4.0 0.2 0.00 3-mo US Treasury US Treasury Current USTreasury Current US Treasury Current US Treasury Current US Treasury Current Bill 2 Yr 3 Yr 5 Yr 10 Yr 30 Yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 0.05 0.00
Bellwether Treasury Average Duration (x-axis) vs Average Yield (y-axis): 12/31/00 - 08/31/19 4.50 US Treasury Current 30 Yr [MSR #6] 4.00 3.50 US Treasury Current 10 Yr [MSR #5] 3.00 US Treasury Current 5 Yr [MSR #1] 2.50 USTreasury Current 3 Yr [MSR #2] US Treasury Current 2 Yr 2.00 [MSR #3] 6-mo US Treasury Bill [MSR 3-mo US Treasury Bill [MSR #4] #7] 1.50 1.00 0.50 0.00 0.00 2.00 4.00 6.00 8.00 Bellwether Treasury 3-mo US Treasury Bill 6-mo US Treasury Bill US Treasury Current 2 Yr USTreasury Current 3 Yr US Treasury Current 5 Yr US Treasury Current 10 Yr US Treasury Current 30 Yr 10.00 12.00 14.00 16.00 Average Edur Average Ytw Main Street Ratio 0.237 0.484 1.919 2.807 4.621 8.514 17.578 1.418 1.528 1.880 2.119 2.586 3.286 3.964 0.000 0.227 0.241 0.250 0.253 0.219 0.145 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 18.00 20.00
Sharpe Ratio (Total Return): 12/00 to 08/19 16.00 0.80 0.73 0.70 14.00 13.9 0.70 0.62 12.00 0.60 Annualized Total Return StdDev Annualized Total Return 10.00 0.50 0.45 Sharpe Ratio (Total Return) 0.39 8.00 7.3 7.0 6.00 0.40 0.30 4.9 4.2 4.00 3.3 2.6 2.00 1.5 0.5 0.00 4.2 0.20 2.4 1.6 0.00 3-mo US Treasury US Treasury Current USTreasury Current US Treasury Current US Treasury Current US Treasury Current Bill 2 Yr 3 Yr 5 Yr 10 Yr 30 Yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 0.10 0.00
Bellwether Treasury Annualized Standard Deviation (x-axis) vs Annualized Total Return (y-axis): 12/31/00 - 08/31/19 8.00 US Treasury Current 30 Yr [SR #6] 7.00 6.00 5.00 US Treasury Current 5 Yr [SR #3] 4.00 USTreasury Current 3 Yr [SR #1] US Treasury Current 2 Yr [SR #2] 3.00 2.00 6-mo US Treasury Bill [SR 3-mo US Treasury #4] Bill [SR #7] 1.00 0.00 US Treasury Current 10 Yr [SR #5] 0.00 2.00 4.00 6.00 Bellwether Treasury 3-mo US Treasury Bill 6-mo US Treasury Bill US Treasury Current 2 Yr USTreasury Current 3 Yr US Treasury Current 5 Yr US Treasury Current 10 Yr US Treasury Current 30 Yr 8.00 10.00 Annualized Total Annualized Total Return StdDev Return 0.500 0.571 1.574 2.421 4.218 7.309 13.918 1.542 1.822 2.642 3.315 4.166 4.859 7.023 12.00 Sharpe Ratio (Total Return) 0.000 0.491 0.699 0.732 0.622 0.454 0.394 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 14.00 16.00
Duration vs StdDev Total Return: 12/00 to 08/19 20.00 0.80 0.73 0.70 18.00 17.6 0.70 0.62 16.00 14.00 13.9 Average Edur Annualized Total Return StdDev 12.00 0.50 0.45 Sharpe Ratio (Total Return) 0.60 0.39 10.00 0.40 8.5 8.00 7.3 0.30 6.00 4.6 4.00 2.8 1.9 2.00 0.00 0.2 0.00 4.2 2.4 1.6 0.20 0.10 0.5 3-mo US Treasury US Treasury Current USTreasury Current US Treasury Current US Treasury Current US Treasury Current Bill 2 Yr 3 Yr 5 Yr 10 Yr 30 Yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 0.00
Bellwether Treasury Avg Eff Duration (x-axis) vs Ann StdDev Total Return (y-axis): 12/31/00 - 08/31/19 16.00 14.00 US Treasury Current 30 Yr 12.00 10.00 8.00 US Treasury Current 10 Yr 6.00 US Treasury Current 5 Yr 4.00 USTreasury Current 3 Yr 2.00 0.00 US Treasury Current 2 Yr 6-moUSUSTreasury TreasuryBill Bill 3-mo 0.00 2.00 4.00 6.00 8.00 10.00 Bellwether Treasury 3-mo US Treasury Bill 6-mo US Treasury Bill US Treasury Current 2 Yr USTreasury Current 3 Yr US Treasury Current 5 Yr US Treasury Current 10 Yr US Treasury Current 30 Yr 12.00 Average Edur 0.237 0.484 1.919 2.807 4.621 8.514 17.578 14.00 16.00 Annualized Total Return StdDev 0.500 0.571 1.574 2.421 4.218 7.309 13.918 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 18.00 20.00
Main Street Ratio (Yield/Duration): 12/00 to 08/19 4.00 0.90 Average Edur 0.82 3.7 Average Ytw 3.50 3.5 Main Street Ratio 0.73 3.2 3.00 2.8 2.50 2.5 0.64 0.80 0.70 2.8 2.7 0.60 0.55 2.4 2.3 2.2 0.50 2.1 2.00 0.36 1.50 0.40 1.5 0.30 0.25 1.00 0.20 0.50 0.10 0.00 0.00 US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A U.S Industrial Corp 1- US Financial Corp 1-5yr Bullet Ex Yanks 5yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA.
Core Indices Average Duration (x-axis) vs Average Yield (y-axis): 12/31/00 - 08/31/19 4.00 US Financial Corp 1-5yr [MSR #1] U.S Industrial Corp 1-5yr [MSR #2] 3.50 US Corp 1-5Yrs AAA-A Bullet Ex Yanks [MSR #3] 3.00 2.50 Agy Callable 1-5Yr [MSR #4] Agy Bullet 1-5Yr [MSR #5] 2.00 US Treasuries 1-5yr [MSR #6] 1.50 3-mo US Treasury Bill [MSR #7] 1.00 0.50 0.00 0.00 0.50 1.00 Fixed Income Sector 3-mo US Treasury Bill US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A Bullet Ex Yanks U.S Industrial Corp 1-5yr US Financial Corp 1-5yr 1.50 2.00 2.50 Average Edur Average Ytw Main Street Ratio 0.237 2.522 2.356 1.492 2.750 2.799 2.735 1.418 2.056 2.258 2.239 3.178 3.463 3.665 0.000 0.253 0.356 0.550 0.640 0.730 0.822 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 3.00
Sharpe Ratio (Total Return): 12/00 to 08/19 5.00 1.20 Annualized Total Return StdDev 1.10 4.6 Annualized Total Return 4.50 4.2 Sharpe Ratio (Total Return) 1.00 0.93 4.00 4.4 3.8 0.87 0.86 3.4 3.50 0.76 3.1 0.76 3.1 3.00 0.80 2.8 2.5 2.50 2.0 2.00 0.60 2.0 0.40 1.50 1.1 1.00 0.20 0.50 0.00 US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A U.S Industrial Corp 1- US Financial Corp 1-5yr Bullet Ex Yanks 5yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 0.00
Core Indices Annualized Standard Deviation (x-axis) vs Annualized Total Return (y-axis): 12/31/00 - 08/31/19 5.00 US Financial Corp 1-5yr [SR #6] 4.50 U.S Industrial Corp 1-5yr [SR #1] US Corp 1-5Yrs AAA-A Bullet Ex Yanks [SR #3] 4.00 3.50 Agy Bullet 1-5Yr [SR #2] US Treasuries 1-5yr [SR #5] 3.00 2.50 Agy Callable 1-5Yr [SR #4] 2.00 3-mo US Treasury Bill [SR #7] 1.50 1.00 0.50 0.00 0.00 0.50 1.00 1.50 Fixed Income Sector 3-mo US Treasury Bill US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A Bullet Ex Yanks U.S Industrial Corp 1-5yr US Financial Corp 1-5yr 2.00 2.50 3.00 Annualized Total Annualized Total Return StdDev Return 0.500 2.048 2.008 1.140 3.058 2.765 3.814 1.542 3.108 3.404 2.518 4.193 4.571 4.435 3.50 4.00 Sharpe Ratio (Total Return) 0.000 0.764 0.927 0.856 0.867 1.095 0.758 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 4.50
Duration vs StdDev Total Return: 12/00 to 08/19 4.50 Average Edur 1.10 Annualized Total Return StdDev 4.00 1.20 3.8 Sharpe Ratio (Total Return) 1.00 0.93 3.50 0.87 0.86 3.1 0.76 3.00 2.50 2.8 2.8 2.8 2.7 0.76 0.80 2.5 2.4 2.0 2.00 0.60 2.0 1.5 1.50 0.40 1.1 1.00 0.20 0.50 0.00 US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A U.S Industrial Corp 1- US Financial Corp 1-5yr Bullet Ex Yanks 5yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 0.00
Core Indices Effective Duration (x-axis) vs Ann StdDev Total Return (y-axis): 12/31/00 - 08/31/19 4.50 4.00 US Financial Corp 1-5yr 3.50 US Corp 1-5Yrs AAA-A Bullet Ex Yanks 3.00 U.S Industrial Corp 1-5yr 2.50 Agy Bullet 1-5Yr US Treasuries 1-5yr 2.00 1.50 Agy Callable 1-5Yr 1.00 3-mo US Treasury Bill 0.50 0.00 0.00 0.50 1.00 1.50 Fixed Income Sector 3-mo US Treasury Bill US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A Bullet Ex Yanks U.S Industrial Corp 1-5yr US Financial Corp 1-5yr 2.00 Average Edur 0.237 2.522 2.356 1.492 2.750 2.799 2.735 2.50 Annualized Total Return StdDev 1.418 2.056 2.258 2.239 3.178 3.463 3.665 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 3.00
Asset Class Risk/Reward Analysis: Sep-03 to Aug-19 12.0 DJIA Annualized Total Return 10.0 8.0 Agg 5Yr 4.0 0.0 (2.0) (4.0) REIT MSCI 30Yr 6.0 2.0 Sp500 Nasdaq 2Yr 6Mo 3Mo 0.0 Db-3Mo 3Yr HFGew 10Yr HF-FF HFG 5.0 10.0 15.0 Cmdy 20.0 Annualized Standard Deviation Total Return Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 25.0
Analysis Start Date: Asset Class/Market Sector 3Mo Tbill 6Mo Tbill 2Yr Treasury BW 3Yr Treasury BW 5Yr Treasury BW 10Yr Treasury BW 30Yr Treasury BW Bond Market Agg S&P 500 Nasdaq Dow Jones Industrial MSCI World Equity Dow Jones REIT Bloomberg Commodity Hedge Fund Global Hedge Fund Equal Wgtd Hedge Fund of Funds DB 3Mo Tbill Index 9/30/2003 Risk-Adjusted Return 2.811 2.973 1.494 1.197 0.898 0.630 0.492 1.280 0.679 0.663 0.731 0.528 0.467 (0.093) 0.184 0.884 0.644 2.834 -- 15.92 Yr(s) -- Analysis End Date: Annualized Standard Annualized Total Return Deviation Total Return 0.486 1.366 0.543 1.615 1.373 2.051 2.124 2.543 3.861 3.467 6.938 4.368 13.963 6.873 3.362 4.302 13.579 9.223 16.474 10.926 13.016 9.509 14.469 7.633 21.958 10.252 16.112 (1.499) 5.297 0.975 5.714 5.052 4.904 3.159 0.462 1.310 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 8/31/2019 Horizon Total Return 24.132 29.062 38.184 49.174 72.095 97.574 188.279 95.616 307.683 421.554 324.983 222.749 373.345 (21.382) 16.719 119.264 64.109 23.039
Total/Book Return: The Good, The Bad & The Ugly Agenda Big Picture – Philosophy, Strategy & Tactics Total/Book Return – What’s the difference? The Good – Risk Management Framework The Bad – Budgeting
Total Return Defined Total Return assumes indifference between Price return & Income return. “Total rate of return measures the increase in the investor’s wealth due to both investment income (for example, dividends and interest) and capital gains (both realized and unrealized). The total rate of return implies that a dollar of wealth is equally meaningful to the investor whether that wealth is generated by the secure income from a 90-day Treasury bill or by the unrealized appreciation in the price of a share of common stock.” Price Income Price Income Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series) (p. 723). Wiley. Kindle Edition. Emphasis added. Mark P. Kritzman. The Portable Financial Analyst: What Practitioners Need to Know (Wiley Finance) (Kindle Locations 452-454). Kindle Edition.
What are your Return Preferences? Total Return assumes indifference between Price return & Income return. Total rate of return measures the increase in the investor’s wealth due to both investment income (for example, dividends and interest) and capital gains (both realized and unrealized). The total rate of return implies that a dollar of wealth is equally meaningful to the investor whether that wealth is generated by the secure income from a 90-day Treasury bill or by the unrealized appreciation in the price of a share of common stock. Income Price Most public funds are income Incomeoriented and put more weight on income. If you don’t budget gains/losses and aren’t tasked with portfolio growth from investments then you likely have an income preference. Price Income Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series) (p. 723). Wiley. Kindle Edition. Emphasis added.
Total Price Cpn : 08/17 to 08/18 4.00 3.50 Annualized Price Return 3.3 Annualized Coupon Return 3.00 3.0 Average Ytw 3.00 3.00 3.2 2.78 2.3 3.00 2.0 2.00 2.41 1.6 2.27 2.50 2.27 1.00 2.00 0.00 US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A U.S Industrial Corp 1Bullet Ex Yanks 5yr US Financial Corp 15yr 1.50 (1.00) (1.3) 1.00 (2.00) (3.00) (2.6) (2.4) 0.50 (3.0) (3.2) (4.00) (3.0) 0.00 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA.
Total Price Cpn : 08/18 to 08/19 4.00 3.50 Annualized Price Return Annualized Coupon Return 3.50 Average Ytw 3.3 3.2 3.00 2.37 2.32 2.50 2.3 2.85 3.6 3.4 3.2 3.2 3.00 2.54 2.8 2.50 2.2 2.00 3.18 3.15 3.6 2.00 2.1 1.8 1.50 1.50 1.00 1.00 0.50 0.50 0.00 US Treasuries 1-5yr Agy Bullet 1-5Yr Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A U.S Industrial Corp 1- US Financial Corp 1-5yr Bullet Ex Yanks 5yr Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. 0.00
Total Price Cpn : 12/00 to 08/19 5.00 4.7 Annualized Price Return 4.4 Annualized Coupon Return 3.67 4.6 3.46 Average Ytw 4.00 4.00 3.50 3.18 3.4 3.00 3.1 3.00 2.26 2.24 2.50 2.5 2.06 2.00 2.00 1.50 1.00 1.00 0.1 0.00 US Treasuries 1-5yr (0.0)Bullet 1-5Yr Agy (0.0) Agy Callable 1-5Yr US Corp 1-5Yrs AAA-A U.S Industrial Corp 15yr Bullet Ex Yanks (0.4) (0.4) (1.00) US Financial Corp 1(0.3) 5yr 0.50 0.00 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA.
We are told that Total Return is “better” than yield. “Yield to maturity (YTM hereafter) is “the standard measure of the total rate of return of the bond over its life. This interest rate is often viewed as a measure of the average rate of return that will be earned on a bond if it is bought now and held until maturity” (Bodie, et al, 2002, p. 426). And it is considered “the most accurate measure of interest rate” (Mishkin, 2004, p. 64). Unfortunately, due to a fact that “yield to maturity will equal the rate of return realized over the life of the bond if all coupons are reinvested at an interest rate equal to the bond’s yield to maturity (Bodie, et al, 2002, p. 429), YTM has been widely misinterpreted as “the true rate of return an investor would receive by holding the security until its maturity if each interest payment is reinvested at the yield to maturity” (Strong, 2004, p.70, italic original). Similar interpretations can be also found in, to name a few, Reilly and Brown (1997, pp.530-531), Madura (1998, p. 217), and Fabozzi and Modigliani (2002, p. 364). “ Richard Cebula & Bill Yang, “Yield to Maturity is Always Received as Promised”, Journal of Economics and Finance Education Volume 7, no. 1 (2008): 43
i Yield IRR Required Rate of Return etc i (FV/PV) (1/n)-1 INTEREST 1. cost of using money, expressed as a rate per period of time, usually one year, in which case it is called an annual rate of interest. (1) REQUIRED RATE OF RETURN return required by investors before they will commit money to an investment at a given level of risk. Unless the expected return exceeds the required return, an investment is unacceptable. See also HURDLE RATE; INTERNAL RATE OF RETURN; MEAN RETURN. (2) INTERNAL RATE OF RETURN (IRR) discount rate at which the present value of the future cash flows of an investment equal the cost of the investment. When the net present values of cash outflows (the cost of the investment) and cash inflows (returns on the investment) equal zero, the rate of discount being used is the IRR. When IRR is greater than the required return-called the hurdle rate in capital budgeting-the the investment is acceptable. (3) 1. 2. 3. 4. YIELD TO MATURITY (YTM) concept used to determine the rate of return an investor will receive if a long-term, interest-bearing investment, such as a bond, is held to its MATURITY DATE. It takes into account purchase price, REDEMPTION value, time to maturity, COUPON yield, and the time between interest payments. Recognizing time value of money, it is the DISCOUNT RATE at which the PRESENT VALUE of all future payments would equal the present price of the bond, also known as INTERNAL RATE OF RETURN. It is implicitly assumed that coupons are reinvested at the YTM rate. YTM can be approximated using a bond value table (also called a bond yield table) or can be determined using a programmable calculator equipped for bond mathematics calculations. See also DURATION; HORIZON ANALYSIS; YIELD TO AVERAGE LIFE, YIELD TO CALL. YIELD TO WORST bond yield assuming worst-case scenario, that is, earliest redemption possible under terms of the INDENTURE. See also YIELD TO CALL; YIELD TO MATURITY. (4) John Downes;Jordan Elliot Goodman. Dictionary of Finance and Investment Terms (Barron's Financial Guides) (Kindle Locations 4807-4808). Kindle Edition. John Downes;Jordan Elliot Goodman. Dictionary of Finance and Investment Terms (Barron's Financial Guides) (Kindle Locations 8221-8222). Kindle Edition. John Downes;Jordan Elliot Goodman. Dictionary of Finance and Investment Terms (Barron's Financial Guides) (Kindle Locations 4849-4852). Kindle Edition. John Downes;Jordan Elliot Goodman. Dictionary of Finance and Investment Terms (Barron's Financial Guides) (Kindle Locations 11433-11438). Kindle Edition.
Par Amount: Treasury Maturity (Yrs): Treasury Settlement Date: Treasury Maturity Date: Coupon Rate: Yield: Price: Coupon Frequency: Price (Excel): Yield (Excel): Modified Duration (Excel): Strategy Webb Constant Maturity Treasury Yield, Duration & Convexity Calculations 1,000,000.00 5.00 08/31/17 08/31/22 1.70% 1.70% 100.000 2.000 100.000 1.70% 4.774 Table Calc Price: Table Calc Yield (IRR): Table Calc Duration: Table Calc Convexity: Maturity 0.00 0.25 0.50 1.00 2.00 3.00 5.00 10.00 30.00 100.000 1.700% 4.774 0.2571 Treasury Yield Curve on 08/31/17 Duration Yield Slope(bp) 0.00 1.07% 0.25 1.01% 0.50 1.08% 7.00 0.99 1.23% 15.00 1.97 1.33% 10.00 2.93 1.44% 11.00 4.77 1.70% 26.00 8.97 2.12% 42.00 20.39 2.73% 61.00 100.042 1.691% 4.773 0.2570 Semi-Annual Periods Cash Flow Present Value @ 1.70% Yield 0 1 2 3 4 5 6 7 8 9 10 Total (1,000,000.00) 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 8,500.00 1,008,500.00 1,085,000.00 (1,000,000.00) 8,428.36 8,357.32 8,286.88 8,217.04 8,147.78 8,079.11 8,011.02 7,943.50 7,876.55 926,652.45 1,000,000.00 Slope(bp) to 3Mo 7.00 22.00 32.00 43.00 69.00 111.00 172.00 Present Value @ Maturity Matched Maturity Matched Discount Rates Rates 1.07% (1,000,000.00) 1.08% 8,454.35 8,396.41 1.23% 1.28% 8,338.87 1.33% 8,277.61 1.39% 8,211.70 1.44% 8,141.88 1.51% 8,065.44 1.57% 7,984.57 1.64% 7,899.43 1.70% 926,652.45 1,000,422.70 Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA.
Strategy Webb Toolkit: Paper Gains/(Losses) Vanish as Time Passes Settlement: Maturity: Par Amount: Price: Coupon: Payment Frequency: Yield(Excel): Duration (Excel): Yield Move ( /-): Time Heals All Wounds 8/31/2019 8/31/2024 1,000,000.00 100.000 1.39% 2 1.39% 4.814 1.00% Price Rates Rise 95.31 95.76 96.21 96.66 97.12 97.59 98.06 98.54 99.02 99.51 99.91 0.00 6.00 12.00 18.00 24.00 30.00 36.00 42.00 48.00 54.00 59.00 Assume rates rise or fall by the amount of the Yield Move ( /-) and see how time heals all wounds. 106 Price Rates Rise 104 Price Rates Fall Price 102 100 98 96 94 0 10 20 30 40 50 60 70 Months Gone by Since Purchase Data from ICE, Bloomberg & FRED. Calculations, graphs & analysis by Kevin Webb, CFA. Price Rates Fall 104.95 104.46 103.97 103.47 102.98 102.49 101.99 101.49 101.00 100.50 100.08
YTM is always received as promised This note points out that the above-mentioned common treatment in many textbooks turns out to be a fallacy. The truth is that YTM on a (coupon) bond is always received regardless of how coupon payments are re-invested, provided that the bond is held until maturity without default. It addresses a basic question in bond theory: between YTM and realized compounding yield (RCY hereafter), which concept measures the true rate of return from holding a coupon bond until maturity? It is well accepted that YTM measures the rate of return from holding a bond until maturity for both coupon bond and zero-coupon bond as well. By definition, the YTM received from holding a bond is independent of how coupon payments are allocated, as long as they are paid on time as contracted. By comparing the initial investment and the final value accumulated over the investment horizon, on the other hand, RCY on a bond measures the rate of return from an account (or trust) that holds the bond and the interests paid. Of course, it depends on how coupon payments are reinvested. We demonstrate that the RCY actually measures the YTM from a combined investment - holding a coupon bond plus an additional periodic investment with each coupon payment received. Not surprisingly, YTM and RCY would be normally unequal; RCY equals YTM if and only if coupon payments are reinvested at the same rate as the initial YTM. However, this conclusion should not be interpreted as “the yield to maturity is actually received only if coupon payments are reinvested at the yield to ma
Total/Book Return: The Good, The Bad & The Ugly Kevin Webb, CFA Kevin.p.webb@pjc.com Piper Jaffray Rick Phillips Rick.Phillips@ftnmainstreet.com President, FTN Main Street Advisors
May 02, 2018 · D. Program Evaluation ͟The organization has provided a description of the framework for how each program will be evaluated. The framework should include all the elements below: ͟The evaluation methods are cost-effective for the organization ͟Quantitative and qualitative data is being collected (at Basics tier, data collection must have begun)
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Chính Văn.- Còn đức Thế tôn thì tuệ giác cực kỳ trong sạch 8: hiện hành bất nhị 9, đạt đến vô tướng 10, đứng vào chỗ đứng của các đức Thế tôn 11, thể hiện tính bình đẳng của các Ngài, đến chỗ không còn chướng ngại 12, giáo pháp không thể khuynh đảo, tâm thức không bị cản trở, cái được
Le genou de Lucy. Odile Jacob. 1999. Coppens Y. Pré-textes. L’homme préhistorique en morceaux. Eds Odile Jacob. 2011. Costentin J., Delaveau P. Café, thé, chocolat, les bons effets sur le cerveau et pour le corps. Editions Odile Jacob. 2010. Crawford M., Marsh D. The driving force : food in human evolution and the future.
Le genou de Lucy. Odile Jacob. 1999. Coppens Y. Pré-textes. L’homme préhistorique en morceaux. Eds Odile Jacob. 2011. Costentin J., Delaveau P. Café, thé, chocolat, les bons effets sur le cerveau et pour le corps. Editions Odile Jacob. 2010. 3 Crawford M., Marsh D. The driving force : food in human evolution and the future.
