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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: Re: YTM vs. CAGR Date: 12/2/2009 3:58 PM
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AP,

Thanks for the feedback, but my numbers are correct.

As I think about yields, there is no second year for a zero, nor for a couponed bond, either. My purchase price is the only price that matters to me. All subsequent income-streams depend on that price. All actual coupons received are not added back to my original investment to enhance its yield. The coupons received are aggregated, and they become new investments. Thus, each initial investment I make can be benchmarked against any other.

The same --for me-- with zeros. The implied coupon payments get aggregrated, but they can't be redeployed until par is received. What I am always interested in knowing is what can I accomplish with the cash that I have to spend. Buying a couponed bond creates one kind of game. Buying a zero creates another. But I need to know when which game is the better choice in terms of the dollars eventually realized from the initial investment only.

Yes, how brokers choose to report yields is for them to determine. But investors need to interpret those numbers as they might make the best sense to them. The impact of inflation is a whole 'nother problem. Some people choose to ignore it or understate it. That's their choice. I prefer to think about my bond returns as CAGR, so I can make direct comparisons with inflation. Others will make different choices for themselves.
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