Rate of Return on Investments: a New Evaluation Procedure

This paper introduces a new procedure to evaluate the rate of return by comparing the reinvestment values of asset-prices and asset-earnings for the entire holding-period. During the investment horizon if market rates, on average, remain constant, then the rate of return (ROR) will be zero; if they rise, the ROR will be negative; and if they fall, the ROR will be positive. When market rates rise (fall), then the time-value of the asset-price-paid increases (decreases) by a larger (smaller) magnitude than the asset-earnings-received, thereby making the ROR negative (positive). These results hold true irrespective of whether the holding period is greater than, equal to, or less than duration; further, it is in stark contrast with the conventionalresults, where the ROR is dependent on the length of the holding period in relation to duration. Within the purview of the proposed-model, if the bond is held to maturity, then under rising (falling) market rate conditions the ROR will be negative (positive); while in the conventional models, opposite conclusions are drawn such that under rising (falling) market rate conditions, the yield-adjusted ROR will be positive (negative).