LoanBook Total Return Engine
Total return measures the comprehensive investment performance over a holding period, accounting for all sources of return, not just yield. A loan purchased at a discount might have an attractive BEY, but if rates change and the mark-to-market price moves against the investor, total return could be negative.
Methodology
Total Return = Income + Amortization/Accretion + Credit Loss + Price Change + Reinvestment
Income: Interest earned over the holding period.
Amortization/Accretion: The purchase discount earned, or the premium given up, as principal is returned at par.
Credit Loss: Principal lost to defaults after recoveries.
Price Change: Change in market value from purchase to the horizon date. The exit price holds the option-adjusted spread constant across scenarios, or uses par or a custom exit price.
Reinvestment: Return earned on interim cashflows reinvested at the assumed reinvestment rate.
The five components sum to the total return exactly. The engine calculates returns at multiple horizons (1Y, 3Y, 5Y, custom) and across 7 rate scenarios (-300 to +300bp). A Monte Carlo return distribution uses Hull-White simulated rate paths.
Key Parameters
| Parameter | Value |
|---|---|
| Default Horizons | 1Y, 3Y, 5Y |
| Rate Scenarios | -300, -200, -100, 0, +100, +200, +300 bp |
| Exit Price Methods | Constant implied COAS, Par, Custom |
Inputs
portfolio_idPortfolio to analyzehorizon_monthsHolding period (12, 36, 60, or custom)purchase_priceEntry price as % of parprojected_cprPrepayment assumptionprojected_cdrDefault assumptionloss_severityLoss given defaultOutputs
total_returnAnnualized total return (%)income_returnInterest income componentamortization_accretionDiscount accretion or premium amortization componentcredit_lossCredit loss componentprice_returnMark-to-market componentreinvestment_returnReinvestment earnings componentscenario_returns7-scenario rate shock returnsbreakeven_yield_moveRate move that produces zero total returnCalibration
Exit price assumptions use the OAS engine for mark-to-market. The Monte Carlo distribution uses Hull-White simulated rate paths.
References
- Fabozzi, F. (2005). "The Handbook of Fixed Income Securities." McGraw-Hill.
- Kalotay, A. (1993). "An Analysis of Total Return." Journal of Fixed Income.
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