Blended Rate

Blended Rate is the average of the rates at which each security with the extended portfolio was formerly bought. Currently it is the previous rates' average (F.J. Fabozzi 1998, p. 137).

Rate Blending

Often, the purchaser of GICs has many contracts but wants to fund one rate to participators' accounts. Calculating the blended rate by averaging is one of the ways to do this based on dollar-weighted rates obtained from different GICs in the portfolio. After this, the mixed indicator is reported to plan participants and saved them to their accounts (F.J. Fabozzi 1998, p. 36).

If the customer does not especially ask for a divergent rate for each staff member, you can use the so-called blended rate. This mixed indicator is an average indicator for all people dealing up with the project (K.M. Kapp 2003, p. 257).

"The Irvine guidelines include an anticipated blended rate which is unexpected as a standard best practice since, as Zeughauser points out, such rates are out of favor now. Blended rates are hourly rates for entire teams. They more or less out the different hourly fees of all the team members. The client is billed at one rate for everybody. Today, there's resistance among many buyers because too much work might be getting assigned to relatively inexperienced associates who bill out more hours at higher rates than is economical for the client" (L. Smith 2001, p. 163, 164).

Blended Annual Rate

"With gift loans between individuals, interest computed during the borrower's taxable year is treated for both the lender and the borrower as transferred on the last day of the borrower's taxable year. Treasury regulations to Section 7872 provide rules for figuring foregone interest. Where a demand loan is in effect for the entire calendar year, a blended annual rate issued by the IRS to simplify reporting may be used to compute the imputed interest. The blended annual rate is announced by the IRS each July. For 2010, the blended rate is only 0.59%. The blended rate is not available if the loan was not outstanding for the entire year or if the loan balance fluctuated; computations provided by Treasury regulations must be used" (J.K. Lasser Institute 2011, p. 4.31 ).

Formula

"$Blended\ Rate=r(w)+(r+CRP)*(1-w)=r+CRP*(1-w)$

r - risk free rate

CRP - Credit Risk Premium

w - a measure of the equity component embedded in the next period Convertible fair price, which can be estimated using the convertibles delta or the probability of conversion" (C. Agar 2005, p. 302).

Examples of Blended Rate

• The blended rate of a portfolio of two bonds could be calculated as the average of the two bond yields. For example, a portfolio of two bonds with yields of 5% and 7%, respectively, would have a blended rate of 6%.
• The blended rate of a portfolio of stocks can be calculated as the weighted average of the individual stock prices. For example, if a portfolio of stocks contains three stocks with prices of $50, $20 and $10, respectively, the blended rate would be calculated as the weighted average of the three prices. The weighted average would be ($50 + $20 + $10)/3 = $30.
• The blended rate of a portfolio of commodities can be calculated as the average of the individual commodity prices. For example, a portfolio of two commodities with prices of $100 and $200, respectively, would have a blended rate of $150.

Advantages of Blended Rate

Blended Rate has several advantages that make it a popular choice for portfolio management. These include:

• Reduced transaction costs: By blending the rate at which securities in a portfolio were bought, the total transaction costs are reduced, since the overall cost of buying the securities is lower.
• Reduced risk: By blending the rate at which securities in a portfolio were bought, the overall risk of the portfolio is reduced, since the rate of return is more likely to be consistent.
• More efficient portfolio management: By blending the rate at which securities in a portfolio were bought, portfolio managers are able to more efficiently manage their portfolios, since they can easily compare the performance of different securities.
• Improved diversification: By blending the rate at which securities in a portfolio were bought, portfolio managers are able to more effectively diversify their portfolios, since they can better spread out the risk between different types of securities.

Limitations of Blended Rate

The blended rate can be a useful tool for investors to gain an estimate of the total cost of a given portfolio, but there are a few key limitations to consider. These include:

• The blended rate does not take into account any changes in the underlying securities of the portfolio. This means that if the price of any of the securities changes after the blended rate has been calculated, the blended rate will not reflect these changes.
• The blended rate also does not take into account any changes in the market conditions that might affect the performance of the portfolio.
• Finally, the blended rate is only an estimate of the cost of a portfolio, so it may not accurately reflect the true cost. It is important to consider any additional fees and expenses that may be associated with the portfolio when calculating the total cost.

Other approaches related to Blended Rate

• Averaging: This approach uses the average of the individual rates to calculate the blended rate. This approach is popular with investors because it allows them to spread their risk across different securities.
• Weighted Averaging: This approach uses the rate of each security to calculate the blended rate, but assigns a weight to each security based on its size or importance. This approach allows investors to focus their investments on the securities that have the highest potential returns.
• Asset Allocation: This approach uses the rates of the individual securities to calculate the blended rate, but takes into account the allocation of the investor’s assets to different asset classes. This approach allows investors to diversify their investments across different asset classes, while still getting the benefit of the blended rate.

In summary, blended rate is the average of the rates at which each security with the extended portfolio was formerly bought. There are three other approaches related to blended rate - averaging, weighted averaging and asset allocation. Each approach has its own advantages and disadvantages, and investors should carefully consider which approach is best for their investment portfolio.

Blended Rate — recommended articles

Net yield — Running yield — Economic value of equity — Vomma — Simple rate of return — Profit factor — Market Risk Premium — Calmar Ratio — Risk-free return

References

• Agar C. (2005), Capital Investment & Financing: a Practical Guide to Financial Evaluation, Elsevier Butterworth-Heinemann, Oxford, p. 302
• Capehart B.L. i in. (2011) Handbook of Web Based Energy Information and Control Systems, The Fairmont Press, Lilburn
• Fabozzi F.J. (1998), The Handbook of Stable Value Investments, Frank J. Fabozzi Associates, New Hope, p. 36, 137
• J.K. Lasser Intitute (2011), J.K. Lasser's Your Income Tax 2011: For Preparing Your 2010 Tax Return, John Wiley & Sons, Hoboken, p. 4.31
• Kapp K.M. (2003), Winning E-Learning Proposals: The Art of Development and Delivery, J. Ross Publishing, Boca Raton, p. 257
• Smith L. (2001), Inside/outside: How Businesses Buy Legal Services, ALM Publishing, Washington, p. 163, 164

Author: Radosław Cieślik