Lend Academy Network Forum
Lending Club Discussion => Investors  LC => Topic started by: patrick.maia on September 06, 2019, 03:03:03 PM

I'm developing a spreadsheet to reproduce the Net Adjusted Return calculated by LC but either i can't get the concepts right or the formula is wrong:
(https://www.lendingclub.com/public/images/9f8d65e/content/aboutNAR/NAR.png)
In the numerator they're multiplying by Principal_{i} and also dividing by Principal_{i}, ain't that redundant?
Also, what exactly is Principal_{i}? Let's say i have a zero coupon loan of $ 1000 to be paid in 10 installments, that means my Principal_{1} = 900, Principal_{2} = 800 ,..., Principal_{9} = 100 and Principal_{10} = 0?
Again, Principal_{10} equals to $0 and the numerator would become 0 right after the last installment is paid, does that makes any sense?)

They just wrote the thing in an unusual way. Its a weighted average.
The thing inside the inner set of parenthesis in the numerator is the thing being averaged, and the Principal sub i outside the inner parenthesis is the weighting factor. You of course recognize the denominator as the sum of the weighting factors. Writing it this way makes it more obvious that it is a weighted average, which helps you see their motivation, but yes it certainly looks strange to leave two variables in the representation which obviously cancel.
Principal sub i is the principal at the ith step. When the principal is 0 you're all done, so you should stop there!
Your example principal numbers presume that the borrower paid on time. Borrowers pay early and late, so be careful to use actual balance, not theoretical balance.
Good luck.
Many of us use our own measure of return, because we have disagreements about what is the right measure. Years ago there was lots of argument here about what formula was "right". For example, the LC measure does not account for cash lying around in your account uninvested because there aren't enough loans that meet your criteria. We've given up on that argument and just each do our own thing these days.