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Dan,

Yes, the example was unfortunate. Subtracting 5% from the nominal YTM returned a value that suggested I had made a mistake with my math.

So let's walk through another example. Let's buy GE's 6.75's of 06/15/32 on 08/24/08 for 102.500. Using Excel's YIELD formula, the nominal YTM would be about 6.5%. If inflation runs 5%, then mere subtraction suggests that the inflation-adjusted YTM would be 1.5%. But if both par and the income-stream are discounted (as I do it), then the adjusted YTM drops to a negative -1.2%.

For short time-frames, the former method is a good-enough approximation. For longer times-frames, it isn't, due to compounding.

Charlie
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