Roll-Down Return

A roll-down return is the return on an investment that is reinvested at a given interest rate. This is in contrast to a simple interest return, which is the return on an investment that is not reinvested.

The formula for calculating a roll-down return is:

(P * (1 + r)^n - P) / P

where:

• P is the initial principal amount
• r is the interest rate
• n is the number of periods

For example, if you invest $100 at an interest rate of 10% for one year, your roll-down return will be:

(100 * (1 + 0.1)^1 - 100) / 100 = 10

This means that your investment will have grown to $110 after one year.

The roll-down return is important because it takes into account the effect of compounding interest. Compounding interest is the process of earning interest on interest, which can significantly increase the value of an investment over time.

The roll-down return can be used to compare different investments with different interest rates and terms. It can also be used to estimate the future value of an investment.

Here are some additional points to keep in mind about roll-down returns:

• The roll-down return is always greater than the simple interest return. This is because compounding interest increases the value of an investment over time.
• The roll-down return is affected by the interest rate and the term of the investment. The higher the interest rate and the longer the term, the greater the roll-down return.
• The roll-down return can be used to compare different investments with different interest rates and terms. It can also be used to estimate the future value of an investment.