YieldReport has explained the term “trading margin” before but in the interests of new readers and those readers who just need some revision, the trading margin is the annualised total percentage return a security gives in the form of income and capital over and above the Bank Bill Swap Rate, otherwise known as “BBSW”.
The income component is typically calculated as the annual income, inclusive of franking credits if present, from a security as a percentage of the “clean” price assuming BBSW remains constant. Any capital gain or capital loss over the life of the security which will arise if the security is purchased at a price different to the face value, which in most cases is $100.00, is then annualised and added or subtracted from the annual percentage income. The trading margin is the difference between this return and BBSW.
Clean price = current price less accrued grossed-up distribution
Clean running yield = annual gross-up distributions divided by clean price
Capital gain/loss to call = $100 – clean price (face value is typically $100)
Annualised capital gain/loss = capital gain/loss to call, amortised from present to call date
Trading margin = Clean running yield + annualised capital gain/loss – BBSW
clean price