Yeah, but if you'd bought the original Lego Millenium Falcon...http://www.ebay.com/itm/Lego-Star-Wa...EAAOSwRr5ZtgGf
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Yeah, but if you'd bought the original Lego Millenium Falcon...http://www.ebay.com/itm/Lego-Star-Wa...EAAOSwRr5ZtgGf
For interest only based on the new (1.5) interest rates and default rates supplied by Harmoney (no guarantee that it is correct):
The below percentages are Annualised Rate of Return based on 1000 loans of $100 each (all invested at the same start time) for a period of 3 years (so fees are 15%).
1 2 3 4 5 A 5.15% 5.87% 6.61% 7.36% 8.11% B 9.24% 9.99% 10.73% 11.09% 11.43% C 12.14% 12.84% 13.14% 13.79% 14.01% D 14.57% 15.08% 15.14% 15.17% 15.16% E 15.45% 15.63% 15.53% 15.37% 15.20% F 15.02% 14.82% 14.66% 14.51% 14.10%
Things to note:
* The above is calculated on a 3 year fixed term for all loans. Clearly many loans are paid off early and since more interest is paid early in a loan this would increase the return.
* Defaults are applied at the same rate every month across the full term - the new Hazard curve shows defaults having a more equal spread and since they are applied equally from the first month, I think it a reasonable approach to get a reasonable representation of default losses.
* Selection of 'better' loans based on even very basic criteria should increase the return.
* There are many small variations that can affect returns, so the above cannot be used as a generalisation of loan returns.
The calculation was done by first determining the annualised rate of return without reinvestment. This rate was then applied to the returns (i.e. principal + interest - fees) for the relevant term remaining (so reinvestment of all returns), with additional defaults applied, resulting in a value that should reflect the full investment return for the full term.
It would be great if someone else wanted to run similar numbers and see if they get similar results...as I think the full return on returns may still not be fully accounted for by the method I've used...
The matching default table for the previous table:
1 2 3 4 5 A 2.3 4.7 5.2 5.7 6.7 B 7.7 8.6 10.1 12.1 14.5 C 18.0 22.4 27.3 34.7 43.4 D 55.6 70.2 87.5 106.0 126.6 E 151.0 177.9 208.6 240.5 272.7 F 304.6 336.4 365.6 393.9 421.4
This shows the total number of defaults expected over the full 3 year period if only the individual grade was selected to achieve the return shown in the previous table - might be enlightening for some! 1000 initial loans, but many more loans are invested in over the 3 year period as principal and interest is returned, more than 2000 loans by the end of year 3.
Note that these defaults are not for the full $100 of each loan, but only the value of principal left when the default occurs.
So as an example: if only E1 loans were invested in (initially 1000 loans of equal value), over 3 years of reinvesting the returns, you should expect 151 defaults, but should achieve a 15.45% return pa. (151 defaults would have a total value of around $7550 assuming $100 invested in each loan)
BOTH OF THE ABOVE TABLES IGNORE TAX!!!
Good work Myles. Kinda confirms my highly unscientific instincts to stick to B.C.D's but also indicates might not be worth going beyond D2 though in practice supply is limited so you get what you can to some extent. Would be really interested to have the standard deviations for the default rate estimates from Harmoney. Could flex the default rates +/- 50% (though suspect more downside than upside at this point in the cycle)and see what returns that yields...