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A break-even spread is range that focuses on spread based on the rate of inflation between two specific time frames. Sometimes referred to as a break-even inflation spread, the focus is on identifying the changes that the rate of inflation have on the ability to avoid a loss on an investment from one date to another. This allows investors to better understand the benefits of cashing in an investment at a specific period of time, rather than choosing to sell it early on or delay that sale for so long that it is no longer possible to at least sell the asset for the amount of the original investment.
In order to understand how a break-even spread is determined, it is necessary to understand what is meant by break-even inflation. This is essentially the difference between the nominal yield associated with the investment in comparison to the real yield. In other words, this type of inflation tracks whether the investors is able to generate the anticipated returns from the investment after adjusting that amount for inflation, or if the final yield is less. Identifying those points can make it easier to determine the ground between those two points, and locate the point that serves as the break-even spread.
Calculating the break-even spread is very important for investors, since it serves as a means of knowing how long to hold onto an asset before the cost of ownership is offset by the returns. For example, an investor who buys a bond for less that the face value will want to project when it would be possible to sell that bond and at least recoup the purchase price plus any expenses associated with owing the bond. In like manner, a venture capitalist will want to know when it would be possible to sell his or her interest in a new company and at least recoup all expenses related to that investment. The goal of identifying the spread is to determine when the asset can be called or sold and still avoid incurring any type of loss.
A number of factors can go into determining the break-even spread for an investment. The amount of the initial investment plus any ongoing expenses must be calculated. In like manner, the performance of the acquired asset in terms of generating revenue must also be taken into account. Allowing for the movement of the economy along the way, the investor can think in terms of real yield from the activity and determine if there is a range or spread in which there is the chance to break even, and when along that range a call or sale would be a good idea.
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