What is the Expected Return of a loan?

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 lost (this lost 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.