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Non-Tech : Derivatives: Darth Vader's Revenge
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To: Henry Volquardsen who wrote (881)4/7/1999 9:33:00 AM
From: Freedom Fighter  Read Replies (1) of 2794
 
Henry,

>>Even if you net out
the prospect of capital gains the reason to make an equity investment vs a debt
investment is that the revenues and earnings of a business can grow while the coupon on
a bond can't. As a disclaimer I am not defending the valuation of the market, just
pointing out what I believe is a weakness in that analysis. <<

For the vast majority of businesses it requires the reinvestment of earnings to produce the earnings growth. So one would have to construct a sort of bond interest reinvestment coupon to make a valid comparison.

Perhaps reinvesting all bond interest in similar bonds except for an amount equal to the dividends of the business/stock it is being compared to.

One could then see how many years it would take for the business yield to catch up to the compound interest of bonds performing like reinvestment.

I did that for the S&P vs. high grade corporates a while back and I will be dead by the time the S&P catches up. I am only 40 and quite healthy.

Wayne

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