• Originally published: 20/07/2020 08:17
Last version published: 23/07/2020 08:58
Publication number: ELQ-49393-2
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# Net Total Return on Bond Investment Calculator

Calculate Net Total Return on Bond Investment Denominated in Any Currency.

Description
With break-down by: Trading Gain/Loss (Realized & Unrealized), Foreign Exchange Gain/Loss (Realized & Unrealized), Interest Received & Accrued, Fees Paid. For fixed rate and zero-coupon bonds.

Net total return is calculated:
• on the outstanding position
• in case of sale (total or partial)
• at expiry date (redemption)
• in trade currency (denomination currency) and in local currency
• for current or past transactions

When buying an asset in foreign currency, there are 2 components to be kept under control:
• Trading gains/losses (difference between purchase price and sale or market price)
• Foreign Exchange gains/losses (delta between exchange rates at purchase and at sale or mark-to-market)

If, for example, you invest €10.000 to buy a bond denominated in USD at a price of say 125 and the exchange rate USD/EUR is say 0,80 (Euros for 1 Dollar), by converting your €10.000 into \$12.500 (10.000/0,80) you will be able to buy \$10.000 face value (\$10000*125/100).

Suppose you subsequently sell your bond at a price of \$130, generating \$13.000. Suppose in the meantime the Euro appreciated vis-à-vis the Dollar, the exchange rate now being 0,70. Your sale proceeds converted to Euro will therefore generate €9.100 (13.000*0,70). Since you originally invested €10.000, you realize a net capital loss of €900.

Now let’s analyze where this comes from:
• you realized a Trading Gain of \$500 [(10000 * (\$130-\$125)] which converted at 0,70 will generate €350
• you realized a Forex Loss of €1.250 [(\$12.500*(0,80-0,70)], due to the USD devaluing
• in net terms you realized a capital loss of €900 (1.250-350)

Now, suppose the bond you invested in - expiring say on July 7, 2030 - pays a coupon of 3% twice a year, on Jan. 7 and July 7. If you bought the bond say on March 10, 2019 and sold it on Jun 3, 2020, in addition to the sales proceeds of \$13.000, in your holding period you will get a net interest income of \$370,68 [or €259,48 (370,68*0,70)], composed as follows:
• -\$50,96 interest paid at purchase on March 10, 2019 from last coupon date of Jan. 7, 2019 (\$10000*3%*62days)/365)
• \$148,77 coupon received on July 7, 2019 (\$10000*3%*181days)/365)
• \$151,23 coupon received on Jan 7, 2020 (\$10000*3%*184days)/365)
• \$121,64 interest received at sale on Jun 3, 2020 from Jan.7, 2020 (\$10000*3%*148days)/365)

As a result, your total return on investment (ROI) will be:
• -6,41% in Euros (-900,00+259,48)/10.000)*100
• +6,97% in USD (500.00+370,68/12.500*100)

This Best Practice includes
1 Excel workbook

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