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Opps. Predictably, one of those formulas has a mistake. This is the correct version: CG = (Par-Par)/Holding-period. Thus, bonds bought at a discount return the equivalent of a 'dividend' each year of the holding-period. Bonds bought at prem to par impose a penalty. The 'divs" get taxed at cap-gains rates. The penalties create CG losses (equivalently, tax credits) that can but used to offset gains (or reduce taxes). It might sound complicated, but it really isn't to set up a template spreadsheet into which an offering-list can be dumped and both taxes and inflation assessed so that it can be determined whether a bond is offering better than a break-even real-yield. None of the intro bond books talk about this. But it's obviously what needs to be done, or else you end up being one of the idiots who buys a 5% CD and thinks he/she is making money. Well, yes, you are making money *provided* you can talk the IRS of assessing taxes on your gains *and* you can talk the grocery store and gas pump into charging you last year's prices (or the decade's before).

That's my quarrel with the idiots who think they understand 'fixed-income investing', but clearly don't. If an investment doesn't return to you at least as much after-tax, after-inflation purchasing-power as you spent to buy the so-called' investment, then you weren't 'investing'. You were just managing some cash as best as you could, and you suffered a loss for your efforts. Losing money isn't necessary a bad thing. If you've got plenty of money to work with, and if you don't want to accept the risks of investing, then a cash-management strategy in which you consume this resource at slow, sensible pace might be a wise plan. All of us attempt to 'conserve' energy. Why not attempt to 'conserve capital' (provided one begins with enough of it)? The problem, however, is that Helicopter Ben (and his Zero Interest Rate Policy) has made it unpleasantly expensive to indulge in capital conservation.
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