What is the Expected Return of a loan?

For loans with buyback mechanism

The expected return is equal to the interest rate earned on the loan.

For loans without buyback mechanism

If you invest in 100 loans of the same segment, you will receive back the principal you invested and earn interest on the vast majority of them. But a fraction will not repay. This is the credit risk.

The Expected Return is the yearly interest rate, net of the estimated yearly credit risk.

For example, borrowers from Segment B will pay in average a yearly interest rate of 8%. Assuming that in average, each year 2.3% of the remaining principal is loss (this loss includes principal defaulted and interest not paid), then the net return should be 5.7% yearly, providing that the investor is well diversified in a large a number of loans.

For segment D, we target a higher return after risk because this segment is more sensitive to a deterioration of the economy.