ABSTRACT
§1-1. The calculation and indeed, the manipulation of returns pervades our everyday lives. When one opens a bank account or line of credit with a financial institution, the rate of interest on surplus funds and/or the rate of interest on the overdraft facilities we expect to use figure highly in the decisions we make about which bank/and or financial institution we will lend our custom to. When it comes to risky assets such as the shares and bonds of publicly listed companies, we make investment decisions by weighing the returns we expect to get from our proposed investments against the risks that are likely to arise from them. Our retirement plans also hinge crucially on the returns earned by the superannuation funds with which we deposit our retirement funds and on the prospective benefits these returns will enable us to enjoy after we retire. All of this presupposes of course that we have a clear understanding of how the returns on a given portfolio or financial instrument ought to be calculated. Hence, the principal brief of this chapter is to identify the pitfalls that may arise from the incorrect calculation and averaging of the returns that accrue on shares, bonds, portfolios and other financial instruments. We begin our analysis with a consideration of the procedures that can be used to compute the returns on bonds.
