No, there is still return but the timing is complicated. That is why notions such as IRR and TWR are invoked. And there is no reason to presume that the interest payments are spent. A person can easily direct them to a money market fund or something and they are still invested, or you can add them to money that gets invested in about anything. It really is not that big a deal except when you are trying to an analyze return from an investment like that down to the nit and then come into some definitional problems. YTM remains perfectly well defined without regard for coupon payments. From a practical point of view it all just goes to some allocation or another in the portfolio. It is true, however, that the whole thing can be end run by just holding a bond fund with auto reinvested dividends. But people have smeared such a black mark on bond funds that they would rather do anything than hold a bond fund.Thanks for that explanation. Helps clarify for me how to think about the coupons. It's my preference to buy TIPs with a low coupon so that most of the return is principal, getting close as possible to a zero coupon bond. With these higher coupons now; e.g., 2% it looks like most of the bonus to inflation is spun off as coupon payments. Unless you're managing those to maturity date, what you're getting at maturity in principal return is close to 0% real return. The coupon payments can get commingled along the way and probably spent. Am I right?YTM assumes nothing about what the investor does with the coupon payments. However, if you want to compute return and include in your return at the end the earnings gained on the coupons wherever they are then invested, then you are going to have to track those investments and what they earn. Keep in mind that if this money is invested somewhere that pays away interest that is then in turn invested somewhere you have to track and add that in and on and on. If you don't reinvest the coupon payments then your holding has cash flow withdrawals and the concept of return must be abandoned in favor or internal rate of return or time weighted average return. YTM is really the same as or similar to an internal rate of return rather than a (total) return.So, I'm looking at long term secondary market TIPS. Questions:
- My understanding is that the yield assumes that the coupon is reinvested at the same rate as the TIPS?
Note return is a rate in time of a ratio. The ratio is dollars gained per dollar and the rate is dollars/dollar/time (for example % PA). So time matters. This is not a complication when all the cash flow is restricted to dollars in at a start and dollars out at a finish. But when dollars are added or removed at arbitrary times along the way the definitions that are meaningful get more complicated.
Statistics: Posted by dbr — Fri May 31, 2024 7:24 pm — Replies 38 — Views 3817
