Mortgage backed bonds

[faezandyc]

I've been trying to input data for a mortgage-backed bond. On a monthly basis, the bond pays some interest and some return of principal.

On the data register screen I see interest, I can enter that fine.

But the "return of principal"... that's different from "return of capital", right?

I'm thinking that "return of principal" has to be treated as a redemption. Does that sound right?

The end result I'm looking for is to see the overall return I'm getting on the bond. This is a bit complicated since there's interest, and some gain on the return of principal since that comes back at 100% whereas the bond was bought at a discount. Basically, the return of principal reduces the face value of the bond.

Sound like I'm on the right track?

Andy

[Mark]

Hi Andy,

You could record it as either a redemption or a return of capital. The best way probably depends on how you are tracking the share balance, and what happens to the share balance after one of these returns. If you want to keep the share balance steady, use a return of capital distribution. If you want the share balance to go down, record a redemption. Either way will work out the performance properly as long as you maintain the value of the investment (shares owned * market price) correctly after one of these returns.