14 ms·

Yale’s 367-year-old water bond still pays interest (2015)

208 points by marc__1 6y ago

kennywinker 6y ago
I’ve heard of this before, but I’m still puzzled by the logic of a loan that never gets paid off. Was this just a bad idea, or does this still happen and there’s a good reason for it? Could the water authority pay the loan back to close it out? Just asking questions to the air, but if anyone knows the answer I’d love to know!
- RobRivera 6y ago
  NPVs tend to converge even on a perpetuity. simple measure of whether the seller will underwrite it, and will there be a market for purchase.
- pjdemers 6y ago
  The UK government used to issue consols, which are perpetual bonds. Over the centuries, they bought them all back. https://en.wikipedia.org/wiki/Consol_(bond) https://en.wikipedia.org/wiki/Consol_(bond)
  - PLenz 6y ago
    Whenever you read in Regency to Victorian books that so-and-so has an income some pounds per year it is usually referring to these.
    - compiler-guy 6y ago
      They often refer to rents paid by tenants on the estate.
- CapriciousCptl 6y ago
  These sorts of bonds used to be more common and in the US. The closest more common semi-equivalent thing today is perpetual preferred stock. Most of it is callable, meaning the issuer can pay it off after a designated period. As for what is used for— it’s cheap capital to run your business with.
- lostlogin 6y ago
  I know nothing about finance but kept thinking in this. There is a wiki on it which says “ Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt.” However the wiki notes that they have no voting rights so aren’t as good as equity. https://en.m.wikipedia.org/wiki/Perpetual_bond https://en.m.wikipedia.org/wiki/Perpetual_bond
  - Scoundreller 6y ago
    Aka « preferred shares », but they often have rules about being redeemed for par value. But in bankruptcy, they get paid after other creditors. The payments are dividends which may have tax advantages/disadvantages.
- IkmoIkmo 6y ago
  > I’ve heard of this before, but I’m still puzzled by the logic of a loan that never gets paid off. Was this just a bad idea, or does this still happen It sounds weird but it's not a bad idea, no. In essence an infinite set of future payments has a finite present value, due to inflation. i.e., suppose inflation is 100%, this means prices will double every year, and the real value of a nominal amount will halven every year. So $100 today, will be worth $50 (in today's money) in a year from now. A year later (2 years), a $100 then will be worth $25 in today's money. Another year later (3 years) it'd be worth $12.5. And so on. As you can see, a nominal future payment, say $100 in 300 years, will start to approach zero. Of course interest rates aren't quite that high, but it's just to get the point across. The interest rate is essentially a discount rate, which lets you value a future amount of money, in today's prices. In the above example, $100 in 3 years would be worth 100 / 2^3 = 12.5 This means that an infinite series of payments (perpetuity) can be calculated as well by simply taking the payment divided by the interest rate to discount it with. So at an interest rate of say 5%, a $100 per year infinitely, would be worth $2000 today. In other words, in a world with 5% interest rates, you'd be indifferent to receive $2000 today, or $100 ad infinitum. They have the same present value.
  - bawolff 6y ago
    Well we have a constant rate of inflation in modern times, how true was that 300 years ago?
    - boltzmann_ 6y ago
      > constant Yeah about that..
  - tantalor 6y ago
    Do you know what website you're on? You should have used $128 or $256.
    - WJW 6y ago
      Real hackers are not limited to numbers that are powers of two.
- howeyc 6y ago
  I believe the water authority could offer to purchase the bond (and then write it off once they own it). It would be up to the current owner to decide if they are willing to sell.
  - gotsa 6y ago
    The price of the bond itself is at least 100x the value it would have to pay for eternity
    - mminer237 6y ago
      100x the annual yield would be assuming a 1% interest rate, so I'm guessing it's worth quite a bit less than that. Long-term government bonds give 2+% returns and fixed term annuities/MYGAs are giving ~4% returns, as far as I know. So I would expect a value more like 30–50 times its eternal annual payments. Heck, inflation is around 2%, so eventually this will be worthless.
      - maclockard 6y ago
        I think they were referring to the historical value of the bond itself makes it worth far more than its strict monetary value over time. So even if its 'worth' 30-50 times more when you do the math, a collector maybe be willing to pay 500 time more due to its rarity.
- ijidak 6y ago
  Conceptually, it seems similar to a royalty. I give you money to be a part of something, and collect a royalty into perpetuity. Or, it's even more like buying land under a building. I sell the land under my building to get some quick cash. And in turn agree to lease the land back from the new owner permanently. Depending on how badly I need the money, it may be my best and only choice...
- Aperocky 6y ago
  Inflation. As long as the perpetual interest are lower than the inflation, then it make sense. I'd imagine all debt so marked in German marks before the German hyperinflation in 1920s gets essentially wiped this way.
- dougmany 6y ago
  I bought some shares in our local coop when they were building a new store to move into. Each share gives 3% interest with no expiration and I can sell it back if I want.
- ArnoVW 6y ago
  If they expire you have to manage the rolling over (creating debt to pay off other debt). If the interest rates have gone up since the original loan, you pay more. This is often forgotten when people say 'but the state can get 0.01% interest loans!'. Sure, true, but if the rate goes to 5%, that 3xGNP loan becomes quite cumbersome to service. At 2.5% fixed forever perhaps it's interesting to keep. Also, I suppose that there are not many bonds that survive 367 year. So a lot of the debt 'disappears' as time goes on.
  - kennywinker 6y ago
    My mortgage does not need to be re-financed in 25 years, since it’s designed to be paid off by then. Since that’s been my main interaction with debt to date, I assumed that’s how it always works. I’m starting to suspect from the comments here that was a bad assumption
    - djbebs 6y ago
      Most debt at this level works with coupons. The debtor simply pays the interest every year and at the end returns the principal
- golergka 6y ago
  Isn't it practically investment?
- wahern 6y ago
  In addition to what others have said, from a historical perspective such bonds were the functional equivalent of stock. That is, these particular bonds effectively represented equity, not debt. Joint-stock, limited liability corporations are relatively recent, especially in terms of market liquidity and legal norms. Whereas the laws regarding bonds and bond payments are much older and were (and in many ways remain) much more consistent across all of Europe and, today, the world. A bond is a type of negotiable instrument, and laws regarding negotiable instruments--which also include checks, letters of credit, mortgages, etc--go back to at least the Medieval period in their literal terms, and in general terms to the Lex Mercatoria (i.e. merchant laws of the Mediterranean trading nations, including the Roman Empire, that were organically preserved through the Medieval period and even up to today). Other commercialized civilizations also had substantially similar laws. Bonds are a relatively safe investment for more than the reasons commonly recited today--e.g. hedging market volatility, etc.
  - deleted 6y ago
    [deleted]
- mywittyname 6y ago
  There are some practical and legal difference between the two, but this "water bond" is more akin to a modern stock certificate. The interest payments are derived from an ownership stake in the a series of dykes and canals, which are managed by a water board. Replace water board with board of directors and interest payment with dividend and nobody would bat an eye at the perpetual aspect. The big difference is that stock certificates usually don't have dividend entitlements outlined on them, while bonds do. However, historically, stock certificates could have either face values or distribution entitlements listed directly. Especially stocks in railways.
- garmaine 6y ago
  The 2nd mortgage on my house is a perpetual loan, so it very much is still a thing. Some context: I could only go 5% down but wanted to avoid PMI, so the other 15% for 20% down on the first mortgage was taken from a 2nd mortgage, which had the perpetual terms. It's more commonly known as an interest-only payment loan. The interest rate is adjustable and I only pay the monthly accumulated interest.
- ThrustVectoring 6y ago
  So a perpetual bond has both major advantages and disadvantages. The advantage is liquidity - all the different issuances are interchangeable like common stock, so instead of N different markets for each of N times the company raised money via selling bonds, there's one market. The disadvantage is that bonds do not just entitle you to periodic coupon payments, but also give you rights according to the face value of the bond in bankruptcy proceedings. Selling bonds far from the "par" you are theoretically owed in bankruptcy has big problems - either the bond is trading above par and you risk not being made "whole", or it is below par and the company is selling bankruptcy liabilities on their assets for pennies on the dollar. The movement of interest rates over time guarantees that one of these situations will eventually hold, so either issuers or buyers will want to adjust the nominal yield (and thus par value), resulting in the loss of interchangeability. Notably, the US government has zero risk of being able to pay its nominal obligations, so is a prime candidate for issuing perpetuals in a way that corporations cannot. Currently, if you buy a new 20-year treasury bond and wait 2 years, you end up with an off-the-run bond that is difficult to efficiently trade. It'd be much better if these instruments did not "expire" as such, and the increased usefulness to investors would wind up reflected in lower financing costs for the government. Theoretically, the entire US treasury bond structure could be replaced with a zero-duration overnight interest account, a perpetual that pays a $1 coupon per day, and an inflation-linked perpetual that pays the CPI as coupon.
- Lazare 6y ago
  Here's one way of thinking about it: Let's say I need $1000 now. I'd like to borrow it, and I'm willing to pay some amount of money back over time to obtain it. Money now is more valuable than money later, so I know the payments will sum to more than $1000. You have some cash on hand right now, and you'd like it to be larger; you're willing to lose access to it for a while in order to get more money later. Let's say I'm a SUPER trustworthy borrower, and that SUPER trustworthy borrowers generally borrow at 2% per year right now. Here are some options that we would expect I (as the borrower) and you (as the lender) would find fairly equivalent: 1. You give me $1000 now, I give you $1,040.78 in 2 years. 2. You give me $1000 now, I give you $20 every month, and $551.46 in 2 years. 3. You give me $1000 now, I give you $17.53 every month for 5 years. 4. You give me $1000 now, I give you $9.20 every month for 10 years. 5. You give me $1000 now, I give you $1.67 every month for 10 years, and $1000 in 10 years. 6. You give me $1000 now, I give you $5.06 every month for 20 years. 7. You give me $1000 now, I give you $1.93 every month for 100 years. Excel has all these functions build in; provide all but one of the rate, the number of periods, the present value (aka PV, here, $1000), the future value (aka FV, the final payment at the end), and the periodic payment size, and it's simple math to calculate the missing value. Note that these all have, at least in theory, an equivalent value. Less money sooner, versus more money later, with the tradeoff defined by the rate (here 2%). If you, as a borrower, look that that and go "I'd really prefer a shorter term" that means the correct rate (for you) should be higher, but if 2% is the right rate, all 7 options will seem about the same. Modern bonds often have the same value for PV and FV (that is, you pay the face value back at the end), but every combination you can imagine exists in the real world, and much financial activity involves people with a payment stream structured one way getting it transformed into one structured another way. One thing you might have noticed: As the period gets longer, the amount you'd need to pay each period gets smaller and smaller, but it's asymptotic to a value. If $1000 now is "worth" $1.93 a month for 100 years, it'd be "worth" $1.67 a month over 500 years. Or indeed, over 1000 years. Turns out, the payment per period works out to the PV times the interest rate. 12% APR is ~0.1667% per month, and $1000 * 0.1667% = ~$1.67 per month. That's the finance 101 calculation, at any rate. In the real world, there's always risk in various forms. One other point: Did you notice that the interest payment on the perpetuity was $1.67, same as for the "standard" 10 year bond? (And note, bond term doesn't matter here; it's the same for 1 year, 5 years, or 20 years.) That's not a coincidence, because they're economically equivalent (ignoring risk, liquidity, etc.). In fact, consider that as practical matter, most bonds issued by national governments will never, ever really be paid off. Instead, as they come due, they are "rolled". The principle for one lot of bonds is paid off by the issuing a new lot. But consider the math: Today I get $1000 by selling you a 5 year bond. Then every month for 5 years I pay $1.67 in interest. Then at the end of 5 years I issue a new bond for $1000 (which, let's say, you ALSO buy), and I use the proceeds to pay off the first bond. Then for 5 years I pay $1.67 in monthly interest, before we do it again. Ignoring the $1000 payments every 5 years, since they cancel out to $0, this borrowing deal is "I get $1000 now, then I pay $1.67 forever", which is...a perpetuity. Conversely, if I did sell you a perpetuity, you could just sell it in 5 years. You'd expect to get $1000 when you sell a perpetuity on those terms, if interest rates haven't changed, so the cash flows for you buying and later selling a perpetuity is identical to buying a bond and holding it to maturity. So in short: Not a bad idea, still happens ALL THE TIME, we just package it differently for various practical reasons.
sickofparadox 6y ago
Tom Scott has an excellent short video about just this topic if you're interested in further information about it. https://www.youtube.com/watch?v=cfSIC8jwbQs https://www.youtube.com/watch?v=cfSIC8jwbQs Quite an interesting video, definitely worth a watch!
fortran77 6y ago
While none have been doing it for 367 years -- and they can stop paying it, or change the terms, at any time so it's not quite like a bond--there are companies who have paid stock dividends continuously for long periods of time. For example Coca-Cola (KO) has paid a dividend since 1920, and Colgate-Palmolive since 1895.
- madcaptenor 6y ago
  The corporate history of AT&T is a bit complicated, but it's paid a dividend every quarter since 1893 (https://investors.att.com/stock-information/historical-stock-information/historical-common-dividends/att-corp https://investors.att.com/stock-information/historical-stock...). At least if you view the current AT&T, which is "really" the old SBC, as the successor of the old AT&T, which the current AT&T would really like you to do.
- mminer237 6y ago
  I mean, companies still sell corporate bonds too, even. They're typically for terms of years, but you can always just buy a new one at the end and it's practically the same thing.
  - yreg 6y ago
    A person upthread mentions that sometimes these bonds are also long term – Disney and Coca Cola have issued 100 year bonds.
kchoudhu 6y ago
CUSIP?
Ericson2314 6y ago
If only there was a temperature clause so when the gulf stream fails the bond is void.
alister 6y ago
> In the 17th century, people sometimes issued perpetual debt. But it is very rare that there is an uninterrupted history when governments or other entities have not defaulted on those debts. Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon the more likely it is that wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms will wipe out your investment.
- coliveira 6y ago
  The biggest threat to interest compounding is inflation. Every time you see someone saying that by saving $X each month you can get $1M in 50 years, the question to answer is: what's gonna be the real value of $1M 50 years from now?
  - cheriot 6y ago
    Only because you're talking about a bond with fixed payments. Operating companies (stocks) handle inflation better because they can raise prices.
    - coliveira 6y ago
      But with companies you're not dealing with interest compounding, you're dealing with a company's growth prospects, which are largely unrelated to interest rates.
      - cheriot 6y ago
        I've not seen a context where people where strict about saying compound interest is exclusive to interest payments. Reinvested dividends and reinvested earnings also compound.
        6y ago
tjalfi 6y ago
This reminds me of the story[0] of a French annuity from 1738 that yields 1.20€ per year. [0] https://news.ycombinator.com/item?id=26559687 https://news.ycombinator.com/item?id=26559687
gpvos 6y ago
Note that the Dutch water boards (waterschappen) are effectively a separate layer of government, apart from the national, provincial and municipal governments. We have elections for them. They raise taxes. Their borders generally do not correspond with provincial or municipal borders.
- ajdlinux 6y ago
  Wikipedia confirms that the Dutch water boards are indeed a highly significant form of local government... > Punishments meted out by water boards were fines for misdemeanors such as emptying waste in the nearest canal; however, according to various historical documents, the death penalty was used more than once for serious offenders who threatened dike safety or water quality
__initbrian__ 6y ago
What actively used financial instrument today has the longest time horizon? 100 years? * sports stadium construction loans UC Berkeley $443 million by 2112 https://www.bloomberg.com/news/features/2017-01-04/college-football-s-top-teams-are-built-on-crippling-debt https://www.bloomberg.com/news/features/2017-01-04/college-f...
- daneyh 6y ago
  Most equity/preferred shares are considered perpetuities (i.e as long as the company is in business) There are many many perpetual bonds still being issued today however they tend to be 'callable' at the option of the issuer ...most after 5/10/30 years, if they aren't called then they maybe called on the same date every 5yrs or so (so I don't really count them as they aren't really 'forever'. Oxford and Cambridge Universities in the UK have recently issued 100 year 'Century' bonds in GBP. Thats the longest i've seen recently (I cover EUR/GBP bond markets at work)
- semi-extrinsic 6y ago
  There have been instances of 1000 year (millennium) bonds, such as Danish energy company Orsted in 2017, Canadian Pacific Corporation in 1883(!), etc. 100 year (century) bonds are a bit more common - Disney issued a century bond in 1993, for instance. Argentina (!) issued a century bond in 2017, which it defaulted on last year, leaving creditors with around 55 cents on the dollar. In general, long term (implicitly high risk) bonds become attractive in low yield environments such as we had been in for a couple of years up until the absolutely humongous amount of stimulus triggered by the current pandemic.
- apaprocki 6y ago
  I see Orsted bonds announced 2/10/2021 with maturity on 2/18/3021. That’s got to be the current winner. Prospectus (PDF): https://orstedcdn.azureedge.net/-/media/www/docs/corp/com/investor/debt_invest/2020/a43787597-oersted-hybrid-prospectus-2021.ashx https://orstedcdn.azureedge.net/-/media/www/docs/corp/com/in...
cameldrv 6y ago
You can really see how much inflation has impacted this. Th note was written for "1,000 Carolus Guilders of 20 Stuivers a piece." I believe the Carolus Guilder was a copy of the Golden Florin, which was 3.5 grams of gold. A gram of gold is about $50 today, so that would make the value of the note $175,000. At the reduced interest rate of 2.5%, the coupon should be $4375 per year. Instead they got $153 for 12 years of interest, a devaluation of 343x.
- deleted 6y ago
  [deleted]
- computator 6y ago
  Could you explain a bit more please? If the annual interest rate was supposed to be 2.5% of the value of 1000 pieces of 3.5g gold coins, which works out to 0.025 x 1000 x 3.5 = 87.5g of gold per year, why aren't they receiving 87.5g of gold or the equivalent of $4375 a year?
  - URSpider94 6y ago
    The loan wasn’t denominated in gold, it was denominated in guilders. At the time, guilders happened to be made of gold, but that’s somewhat irrelevant. The interest is 2.5% of the initial value of the bond in guilders, which has almost certainly deflated drastically, and will continue to do so. Put another way, the loan will continue to pay out 14 Euro per year 100 years from now, when that will likely be the cost of one can of soda.
- ww520 6y ago
  In other words, inflation wipes out debt. No wonder all governments issuing debt like crazy.
  - moonchild 6y ago
    No, because interest on debt compounds and the rates are frequently higher than inflation.
alsetmusic 6y ago
For those who enjoy podcasts, 99% Invisible talked about this in an episode last year. https://99percentinvisible.org/episode/mini-stories-volume-8/2/ https://99percentinvisible.org/episode/mini-stories-volume-8... It’s an excellent show covering a broad swatch of topics. I generally learn things from their reporting. The episode on Froebel blocks was captivating to me. I’m awaiting my niece’s third bday to buy her a set (choking hazard).
prepend 6y ago
> It is a bearer bond, meaning anyone who presents the addendum to the issuing authority can collect the interest. The water board kept no register of ownership of the bond. These types of bonds seem so interesting to me as they seem fraught with risk of theft,fire, and other harm. Why would I as an investor prefer this over some form of registration? Is it just to provide anonymity? Wikipedia[0] only states that benefit but then the US Treasury issued them until a few decades ago. If the only purpose is anonymity and illegal stuff, then why would a government issue them? It doesn’t seem like the demand is so high that they couldn’t issue similar debt that wasn’t bearer. Does this mean there’s some illicit gain that an issuer gets? I suppose that the percent that gets lost or destroyed would make them more attractive? It would be comical if an unscrupulous issuer actively sought out the bonds to destroy. [0] https://en.wikipedia.org/wiki/Bearer_bond https://en.wikipedia.org/wiki/Bearer_bond
- oconnor663 6y ago
  Just shooting from the hip here, maybe bearer bonds were a lot easier to sell back in the era before universal telegraph/telephone service? And then maybe they just took a while to go away, as old financial institutions often do?

208 points by marc__1 6y ago

I’ve heard of this before, but I’m still puzzled by the logic of a loan that never gets paid off. Was this just a bad idea, or does this still happen and there’s a good reason for it? Could the water authority pay the loan back to close it out? Just asking questions to the air, but if anyone knows the answer I’d love to know!

RobRivera 6y ago
NPVs tend to converge even on a perpetuity. simple measure of whether the seller will underwrite it, and will there be a market for purchase.
pjdemers 6y ago
The UK government used to issue consols, which are perpetual bonds. Over the centuries, they bought them all back. https://en.wikipedia.org/wiki/Consol_(bond) https://en.wikipedia.org/wiki/Consol_(bond)
- PLenz 6y ago
  Whenever you read in Regency to Victorian books that so-and-so has an income some pounds per year it is usually referring to these.
  - compiler-guy 6y ago
    They often refer to rents paid by tenants on the estate.
CapriciousCptl 6y ago
These sorts of bonds used to be more common and in the US. The closest more common semi-equivalent thing today is perpetual preferred stock. Most of it is callable, meaning the issuer can pay it off after a designated period. As for what is used for— it’s cheap capital to run your business with.
lostlogin 6y ago
I know nothing about finance but kept thinking in this. There is a wiki on it which says “ Perpetual bond, which is also known as a perpetual or just a perp, is a bond with no maturity date. Therefore, it may be treated as equity, not as debt.” However the wiki notes that they have no voting rights so aren’t as good as equity. https://en.m.wikipedia.org/wiki/Perpetual_bond https://en.m.wikipedia.org/wiki/Perpetual_bond
- Scoundreller 6y ago
  Aka « preferred shares », but they often have rules about being redeemed for par value. But in bankruptcy, they get paid after other creditors. The payments are dividends which may have tax advantages/disadvantages.
IkmoIkmo 6y ago
> I’ve heard of this before, but I’m still puzzled by the logic of a loan that never gets paid off. Was this just a bad idea, or does this still happen It sounds weird but it's not a bad idea, no. In essence an infinite set of future payments has a finite present value, due to inflation. i.e., suppose inflation is 100%, this means prices will double every year, and the real value of a nominal amount will halven every year. So $100 today, will be worth $50 (in today's money) in a year from now. A year later (2 years), a $100 then will be worth $25 in today's money. Another year later (3 years) it'd be worth $12.5. And so on. As you can see, a nominal future payment, say $100 in 300 years, will start to approach zero. Of course interest rates aren't quite that high, but it's just to get the point across. The interest rate is essentially a discount rate, which lets you value a future amount of money, in today's prices. In the above example, $100 in 3 years would be worth 100 / 2^3 = 12.5 This means that an infinite series of payments (perpetuity) can be calculated as well by simply taking the payment divided by the interest rate to discount it with. So at an interest rate of say 5%, a $100 per year infinitely, would be worth $2000 today. In other words, in a world with 5% interest rates, you'd be indifferent to receive $2000 today, or $100 ad infinitum. They have the same present value.
- bawolff 6y ago
  Well we have a constant rate of inflation in modern times, how true was that 300 years ago?
  - boltzmann_ 6y ago
    > constant Yeah about that..
- tantalor 6y ago
  Do you know what website you're on? You should have used $128 or $256.
  - WJW 6y ago
    Real hackers are not limited to numbers that are powers of two.
howeyc 6y ago
I believe the water authority could offer to purchase the bond (and then write it off once they own it). It would be up to the current owner to decide if they are willing to sell.
- gotsa 6y ago
  The price of the bond itself is at least 100x the value it would have to pay for eternity
  - mminer237 6y ago
    100x the annual yield would be assuming a 1% interest rate, so I'm guessing it's worth quite a bit less than that. Long-term government bonds give 2+% returns and fixed term annuities/MYGAs are giving ~4% returns, as far as I know. So I would expect a value more like 30–50 times its eternal annual payments. Heck, inflation is around 2%, so eventually this will be worthless.
    - maclockard 6y ago
      I think they were referring to the historical value of the bond itself makes it worth far more than its strict monetary value over time. So even if its 'worth' 30-50 times more when you do the math, a collector maybe be willing to pay 500 time more due to its rarity.
ijidak 6y ago
Conceptually, it seems similar to a royalty. I give you money to be a part of something, and collect a royalty into perpetuity. Or, it's even more like buying land under a building. I sell the land under my building to get some quick cash. And in turn agree to lease the land back from the new owner permanently. Depending on how badly I need the money, it may be my best and only choice...
Aperocky 6y ago
Inflation. As long as the perpetual interest are lower than the inflation, then it make sense. I'd imagine all debt so marked in German marks before the German hyperinflation in 1920s gets essentially wiped this way.
dougmany 6y ago
I bought some shares in our local coop when they were building a new store to move into. Each share gives 3% interest with no expiration and I can sell it back if I want.
ArnoVW 6y ago
If they expire you have to manage the rolling over (creating debt to pay off other debt). If the interest rates have gone up since the original loan, you pay more. This is often forgotten when people say 'but the state can get 0.01% interest loans!'. Sure, true, but if the rate goes to 5%, that 3xGNP loan becomes quite cumbersome to service. At 2.5% fixed forever perhaps it's interesting to keep. Also, I suppose that there are not many bonds that survive 367 year. So a lot of the debt 'disappears' as time goes on.
- kennywinker 6y ago
  My mortgage does not need to be re-financed in 25 years, since it’s designed to be paid off by then. Since that’s been my main interaction with debt to date, I assumed that’s how it always works. I’m starting to suspect from the comments here that was a bad assumption
  - djbebs 6y ago
    Most debt at this level works with coupons. The debtor simply pays the interest every year and at the end returns the principal
golergka 6y ago
Isn't it practically investment?
wahern 6y ago
In addition to what others have said, from a historical perspective such bonds were the functional equivalent of stock. That is, these particular bonds effectively represented equity, not debt. Joint-stock, limited liability corporations are relatively recent, especially in terms of market liquidity and legal norms. Whereas the laws regarding bonds and bond payments are much older and were (and in many ways remain) much more consistent across all of Europe and, today, the world. A bond is a type of negotiable instrument, and laws regarding negotiable instruments--which also include checks, letters of credit, mortgages, etc--go back to at least the Medieval period in their literal terms, and in general terms to the Lex Mercatoria (i.e. merchant laws of the Mediterranean trading nations, including the Roman Empire, that were organically preserved through the Medieval period and even up to today). Other commercialized civilizations also had substantially similar laws. Bonds are a relatively safe investment for more than the reasons commonly recited today--e.g. hedging market volatility, etc.
- deleted 6y ago
  [deleted]
mywittyname 6y ago
There are some practical and legal difference between the two, but this "water bond" is more akin to a modern stock certificate. The interest payments are derived from an ownership stake in the a series of dykes and canals, which are managed by a water board. Replace water board with board of directors and interest payment with dividend and nobody would bat an eye at the perpetual aspect. The big difference is that stock certificates usually don't have dividend entitlements outlined on them, while bonds do. However, historically, stock certificates could have either face values or distribution entitlements listed directly. Especially stocks in railways.
garmaine 6y ago
The 2nd mortgage on my house is a perpetual loan, so it very much is still a thing. Some context: I could only go 5% down but wanted to avoid PMI, so the other 15% for 20% down on the first mortgage was taken from a 2nd mortgage, which had the perpetual terms. It's more commonly known as an interest-only payment loan. The interest rate is adjustable and I only pay the monthly accumulated interest.
ThrustVectoring 6y ago
So a perpetual bond has both major advantages and disadvantages. The advantage is liquidity - all the different issuances are interchangeable like common stock, so instead of N different markets for each of N times the company raised money via selling bonds, there's one market. The disadvantage is that bonds do not just entitle you to periodic coupon payments, but also give you rights according to the face value of the bond in bankruptcy proceedings. Selling bonds far from the "par" you are theoretically owed in bankruptcy has big problems - either the bond is trading above par and you risk not being made "whole", or it is below par and the company is selling bankruptcy liabilities on their assets for pennies on the dollar. The movement of interest rates over time guarantees that one of these situations will eventually hold, so either issuers or buyers will want to adjust the nominal yield (and thus par value), resulting in the loss of interchangeability. Notably, the US government has zero risk of being able to pay its nominal obligations, so is a prime candidate for issuing perpetuals in a way that corporations cannot. Currently, if you buy a new 20-year treasury bond and wait 2 years, you end up with an off-the-run bond that is difficult to efficiently trade. It'd be much better if these instruments did not "expire" as such, and the increased usefulness to investors would wind up reflected in lower financing costs for the government. Theoretically, the entire US treasury bond structure could be replaced with a zero-duration overnight interest account, a perpetual that pays a $1 coupon per day, and an inflation-linked perpetual that pays the CPI as coupon.
Lazare 6y ago
Here's one way of thinking about it: Let's say I need $1000 now. I'd like to borrow it, and I'm willing to pay some amount of money back over time to obtain it. Money now is more valuable than money later, so I know the payments will sum to more than $1000. You have some cash on hand right now, and you'd like it to be larger; you're willing to lose access to it for a while in order to get more money later. Let's say I'm a SUPER trustworthy borrower, and that SUPER trustworthy borrowers generally borrow at 2% per year right now. Here are some options that we would expect I (as the borrower) and you (as the lender) would find fairly equivalent: 1. You give me $1000 now, I give you $1,040.78 in 2 years. 2. You give me $1000 now, I give you $20 every month, and $551.46 in 2 years. 3. You give me $1000 now, I give you $17.53 every month for 5 years. 4. You give me $1000 now, I give you $9.20 every month for 10 years. 5. You give me $1000 now, I give you $1.67 every month for 10 years, and $1000 in 10 years. 6. You give me $1000 now, I give you $5.06 every month for 20 years. 7. You give me $1000 now, I give you $1.93 every month for 100 years. Excel has all these functions build in; provide all but one of the rate, the number of periods, the present value (aka PV, here, $1000), the future value (aka FV, the final payment at the end), and the periodic payment size, and it's simple math to calculate the missing value. Note that these all have, at least in theory, an equivalent value. Less money sooner, versus more money later, with the tradeoff defined by the rate (here 2%). If you, as a borrower, look that that and go "I'd really prefer a shorter term" that means the correct rate (for you) should be higher, but if 2% is the right rate, all 7 options will seem about the same. Modern bonds often have the same value for PV and FV (that is, you pay the face value back at the end), but every combination you can imagine exists in the real world, and much financial activity involves people with a payment stream structured one way getting it transformed into one structured another way. One thing you might have noticed: As the period gets longer, the amount you'd need to pay each period gets smaller and smaller, but it's asymptotic to a value. If $1000 now is "worth" $1.93 a month for 100 years, it'd be "worth" $1.67 a month over 500 years. Or indeed, over 1000 years. Turns out, the payment per period works out to the PV times the interest rate. 12% APR is ~0.1667% per month, and $1000 * 0.1667% = ~$1.67 per month. That's the finance 101 calculation, at any rate. In the real world, there's always risk in various forms. One other point: Did you notice that the interest payment on the perpetuity was $1.67, same as for the "standard" 10 year bond? (And note, bond term doesn't matter here; it's the same for 1 year, 5 years, or 20 years.) That's not a coincidence, because they're economically equivalent (ignoring risk, liquidity, etc.). In fact, consider that as practical matter, most bonds issued by national governments will never, ever really be paid off. Instead, as they come due, they are "rolled". The principle for one lot of bonds is paid off by the issuing a new lot. But consider the math: Today I get $1000 by selling you a 5 year bond. Then every month for 5 years I pay $1.67 in interest. Then at the end of 5 years I issue a new bond for $1000 (which, let's say, you ALSO buy), and I use the proceeds to pay off the first bond. Then for 5 years I pay $1.67 in monthly interest, before we do it again. Ignoring the $1000 payments every 5 years, since they cancel out to $0, this borrowing deal is "I get $1000 now, then I pay $1.67 forever", which is...a perpetuity. Conversely, if I did sell you a perpetuity, you could just sell it in 5 years. You'd expect to get $1000 when you sell a perpetuity on those terms, if interest rates haven't changed, so the cash flows for you buying and later selling a perpetuity is identical to buying a bond and holding it to maturity. So in short: Not a bad idea, still happens ALL THE TIME, we just package it differently for various practical reasons.

sickofparadox 6y ago

Tom Scott has an excellent short video about just this topic if you're interested in further information about it. https://www.youtube.com/watch?v=cfSIC8jwbQs https://www.youtube.com/watch?v=cfSIC8jwbQs Quite an interesting video, definitely worth a watch!

fortran77 6y ago

While none have been doing it for 367 years -- and they can stop paying it, or change the terms, at any time so it's not quite like a bond--there are companies who have paid stock dividends continuously for long periods of time. For example Coca-Cola (KO) has paid a dividend since 1920, and Colgate-Palmolive since 1895.

madcaptenor 6y ago
The corporate history of AT&T is a bit complicated, but it's paid a dividend every quarter since 1893 (https://investors.att.com/stock-information/historical-stock-information/historical-common-dividends/att-corp https://investors.att.com/stock-information/historical-stock...). At least if you view the current AT&T, which is "really" the old SBC, as the successor of the old AT&T, which the current AT&T would really like you to do.
mminer237 6y ago
I mean, companies still sell corporate bonds too, even. They're typically for terms of years, but you can always just buy a new one at the end and it's practically the same thing.
- yreg 6y ago
  A person upthread mentions that sometimes these bonds are also long term – Disney and Coca Cola have issued 100 year bonds.

kchoudhu 6y ago

CUSIP?

Ericson2314 6y ago

If only there was a temperature clause so when the gulf stream fails the bond is void.

alister 6y ago

> In the 17th century, people sometimes issued perpetual debt. But it is very rare that there is an uninterrupted history when governments or other entities have not defaulted on those debts. Ever see those banking website ads or financial planning brochures that tell you that you can become a millionaire by the time you retire if you sock away just $75 a month through the magic of compound interest? The math checks out, but the longer the time horizon the more likely it is that wars, bankruptcies, currency devaluations, revolutions, government confiscations, hyperinflationary periods, and other economic cataclysms will wipe out your investment.

coliveira 6y ago
The biggest threat to interest compounding is inflation. Every time you see someone saying that by saving $X each month you can get $1M in 50 years, the question to answer is: what's gonna be the real value of $1M 50 years from now?
- cheriot 6y ago
  Only because you're talking about a bond with fixed payments. Operating companies (stocks) handle inflation better because they can raise prices.
  - coliveira 6y ago
    But with companies you're not dealing with interest compounding, you're dealing with a company's growth prospects, which are largely unrelated to interest rates.
    - cheriot 6y ago
      I've not seen a context where people where strict about saying compound interest is exclusive to interest payments. Reinvested dividends and reinvested earnings also compound.
      - 6y ago

tjalfi 6y ago

This reminds me of the story[0] of a French annuity from 1738 that yields 1.20€ per year. [0] https://news.ycombinator.com/item?id=26559687 https://news.ycombinator.com/item?id=26559687

gpvos 6y ago

Note that the Dutch water boards (waterschappen) are effectively a separate layer of government, apart from the national, provincial and municipal governments. We have elections for them. They raise taxes. Their borders generally do not correspond with provincial or municipal borders.

ajdlinux 6y ago
Wikipedia confirms that the Dutch water boards are indeed a highly significant form of local government... > Punishments meted out by water boards were fines for misdemeanors such as emptying waste in the nearest canal; however, according to various historical documents, the death penalty was used more than once for serious offenders who threatened dike safety or water quality

__initbrian__ 6y ago

What actively used financial instrument today has the longest time horizon? 100 years? * sports stadium construction loans UC Berkeley $443 million by 2112 https://www.bloomberg.com/news/features/2017-01-04/college-football-s-top-teams-are-built-on-crippling-debt https://www.bloomberg.com/news/features/2017-01-04/college-f...

daneyh 6y ago
Most equity/preferred shares are considered perpetuities (i.e as long as the company is in business) There are many many perpetual bonds still being issued today however they tend to be 'callable' at the option of the issuer ...most after 5/10/30 years, if they aren't called then they maybe called on the same date every 5yrs or so (so I don't really count them as they aren't really 'forever'. Oxford and Cambridge Universities in the UK have recently issued 100 year 'Century' bonds in GBP. Thats the longest i've seen recently (I cover EUR/GBP bond markets at work)
semi-extrinsic 6y ago
There have been instances of 1000 year (millennium) bonds, such as Danish energy company Orsted in 2017, Canadian Pacific Corporation in 1883(!), etc. 100 year (century) bonds are a bit more common - Disney issued a century bond in 1993, for instance. Argentina (!) issued a century bond in 2017, which it defaulted on last year, leaving creditors with around 55 cents on the dollar. In general, long term (implicitly high risk) bonds become attractive in low yield environments such as we had been in for a couple of years up until the absolutely humongous amount of stimulus triggered by the current pandemic.
apaprocki 6y ago
I see Orsted bonds announced 2/10/2021 with maturity on 2/18/3021. That’s got to be the current winner. Prospectus (PDF): https://orstedcdn.azureedge.net/-/media/www/docs/corp/com/investor/debt_invest/2020/a43787597-oersted-hybrid-prospectus-2021.ashx https://orstedcdn.azureedge.net/-/media/www/docs/corp/com/in...

cameldrv 6y ago

You can really see how much inflation has impacted this. Th note was written for "1,000 Carolus Guilders of 20 Stuivers a piece." I believe the Carolus Guilder was a copy of the Golden Florin, which was 3.5 grams of gold. A gram of gold is about $50 today, so that would make the value of the note $175,000. At the reduced interest rate of 2.5%, the coupon should be $4375 per year. Instead they got $153 for 12 years of interest, a devaluation of 343x.

deleted 6y ago
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computator 6y ago
Could you explain a bit more please? If the annual interest rate was supposed to be 2.5% of the value of 1000 pieces of 3.5g gold coins, which works out to 0.025 x 1000 x 3.5 = 87.5g of gold per year, why aren't they receiving 87.5g of gold or the equivalent of $4375 a year?
- URSpider94 6y ago
  The loan wasn’t denominated in gold, it was denominated in guilders. At the time, guilders happened to be made of gold, but that’s somewhat irrelevant. The interest is 2.5% of the initial value of the bond in guilders, which has almost certainly deflated drastically, and will continue to do so. Put another way, the loan will continue to pay out 14 Euro per year 100 years from now, when that will likely be the cost of one can of soda.
ww520 6y ago
In other words, inflation wipes out debt. No wonder all governments issuing debt like crazy.
- moonchild 6y ago
  No, because interest on debt compounds and the rates are frequently higher than inflation.

alsetmusic 6y ago

For those who enjoy podcasts, 99% Invisible talked about this in an episode last year. https://99percentinvisible.org/episode/mini-stories-volume-8/2/ https://99percentinvisible.org/episode/mini-stories-volume-8... It’s an excellent show covering a broad swatch of topics. I generally learn things from their reporting. The episode on Froebel blocks was captivating to me. I’m awaiting my niece’s third bday to buy her a set (choking hazard).

prepend 6y ago

> It is a bearer bond, meaning anyone who presents the addendum to the issuing authority can collect the interest. The water board kept no register of ownership of the bond. These types of bonds seem so interesting to me as they seem fraught with risk of theft,fire, and other harm. Why would I as an investor prefer this over some form of registration? Is it just to provide anonymity? Wikipedia[0] only states that benefit but then the US Treasury issued them until a few decades ago. If the only purpose is anonymity and illegal stuff, then why would a government issue them? It doesn’t seem like the demand is so high that they couldn’t issue similar debt that wasn’t bearer. Does this mean there’s some illicit gain that an issuer gets? I suppose that the percent that gets lost or destroyed would make them more attractive? It would be comical if an unscrupulous issuer actively sought out the bonds to destroy. [0] https://en.wikipedia.org/wiki/Bearer_bond https://en.wikipedia.org/wiki/Bearer_bond

oconnor663 6y ago
Just shooting from the hip here, maybe bearer bonds were a lot easier to sell back in the era before universal telegraph/telephone service? And then maybe they just took a while to go away, as old financial institutions often do?