| Title: | Market Investing |
| Moderator: | 2155::michaud |
| Created: | Thu Jan 23 1992 |
| Last Modified: | Thu Jun 05 1997 |
| Last Successful Update: | Fri Jun 06 1997 |
| Number of topics: | 1060 |
| Total number of notes: | 10477 |
Prof. Albert Fredman of Cal State U. is paraphrased in the 8/15/93 issue of "Bottom Line" as follows: The interest rate on bonds is unpredictable -- no matter what the coupon says. REASON: To get the coupon yield, all interest must be reinvested at the same rate. If this is not possible, the bond's total return will be lower than what the coupon says. EXAMPLE: A 30-yr. Treasury bond with an 8% coupon yields 8% for the full 30-year term only if each interest payment is immediately reinvested at 8%. But if payments are reinvested at 4%, the bond's return drops to 5.8%. ---- What am I missing here? Is it correct to define "total return" to include the reinvestment rate?
| T.R | Title | User | Personal Name | Date | Lines |
|---|---|---|---|---|---|
| 533.1 | The aye's have it | NOVA::FINNERTY | Sell high, buy low | Tue Jul 20 1993 09:44 | 13 |
re: is it correct?
yes/no. consider the comparison with a zero coupon bond yielding the
same face amount. there is no re-investment of dividends because
there are no interim dividends; so for ordinary bonds with regular
interest payments what the Prof said is true, but for zeroes it is
not true.
on the other hand, the return is still a _nominal_ 8% return - the
future inflation rate unknowable; so the _real_ interest earned on
any bond (other than a bond indexed to inflation) is unknowable.
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