What is Total Return?
Total return measures the complete economic outcome of holding a loan or portfolio over a specified period. It has four components: Income Return (interest received), Principal Return (net principal including prepayments minus losses), Price Return (mark-to-market change), and Reinvestment Return (earnings on reinvested interim cashflows). Total return is superior to yield as a performance measure because yield ignores mark-to-market risk. A high-yielding loan purchased at a premium can have negative total return if rates rise enough to reduce its market value.
Formula
Total Return = Income Return + Principal Return + Price Return + Reinvestment Return Each component = Component Value / Beginning Market Value
How LoanBook Uses Total Return
LoanBook's Total Return Engine calculates returns at multiple horizons (1Y, 3Y, 5Y) across 7 rate scenarios (-300 to +300bp). It includes Monte Carlo return distributions and breakeven analysis (the rate move that produces zero total return).
Frequently Asked Questions
Why does total return matter more than yield?
Yield assumes you hold to maturity and ignores price changes. In practice, if you sell before maturity or mark-to-market for regulatory reporting, price changes affect your realized return. Total return captures both income and price effects.
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