haha
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I use an excell function for accretion. ISM is cpi+2.05; OSM is CPI +2.00.wab said:How are you calculating yield?
I'm just using the moneychimp YTM calc, and assuming that par is $25 for both issues (but maturities differ). You don't need to make any assumptions about inflation, since both issues use the same coupon formula.
I disagree that it won' t matter what inflation is. Because you are buying either of these at a steep discount to par, your real current yield increases with CPI inflation and so therefore does the real YTM. I can't explain it very well, but if you make a spreadsheet I think you will see what I mean. If I had paid par, current nominal yield would be just inflation + 2.05% (ISM). Backing out inflation, you have just what you said-CPI +2.05%. regardless of the level of inflation.
However, since I paid 21.27, my nominal current yield is 25/21.27*(2.05+CPI). And my nominal YTM is this term +accretion of discount. So back out the nominal component, and anytime you buy below par you have real yield enhanced by (factor>1)*(cpi+2.05).
At least that is how I see it.
Ha