4 ms·

I wish governments issued perpetual bonds. It would make thinking about finance much easier if you could directly convert a stock to a flow and vice-versa.

refurb 4y ago
How do you value a perpetual bond in an inflationary environment? A 3% return in perpetuity isn't very valuable when inflation > 3%.
- nly 4y ago
  Well, you can have inflation linked bonds, but usually the issuer is in some way involved in setting determining the inflation index...
chollida1 4y ago
> It would make thinking about finance much easier if you could directly convert a stock to a flow and vice-versa. Can you explain this please? Because I can't really see how converting stock to flow and more specifically flow to stock makes thinking abut finance easier. But the idea seems interesting, what am I missing?
justincormack 4y ago
The UK had some outstanding until recently, but I don't think there are any left https://www.gov.uk/government/news/chancellor-to-repay-the-nations-first-world-war-debt https://www.gov.uk/government/news/chancellor-to-repay-the-n...
- OscarCunningham 4y ago
  My understanding is that all British consols were callable; the government had the option to force redemption of the bond at a fixed price. This means that they're a slightly more complicated product than the direct stock-for-flow exchange that I'm imagining.
robocat 4y ago
A perpetual bond with no inflation adjustment only really makes sense in a zero inflation environment. The mathematical Net Present Value is $20000 for a perpetual cash flow income of $1000 every year with 5% inflation. (convergent infinite geometric series). In most cases any income further than some decades away should be valued at near zero - stocks due to market risk - even government bonds are not risk free. The future is volatile.
- ghaff 4y ago
  It "makes sense" to the same degree a 30 year non-callable bond makes sense--which is a long time but, in the US, 30-year fixed mortgages are obviously quite common.
  - Retric 4y ago
    You can directly compare the net president value at issuance of a a 30 year loan at 6% that repays it’s principal vs a infinite loan that doesn’t assuming say 2% inflation rate. However when you realize managing loans isn’t free and neither 2% inflation nor perpetual repayment is guaranteed; getting the principal back starts to look even better.

refurb 4y ago

How do you value a perpetual bond in an inflationary environment? A 3% return in perpetuity isn't very valuable when inflation > 3%.

nly 4y ago
Well, you can have inflation linked bonds, but usually the issuer is in some way involved in setting determining the inflation index...

chollida1 4y ago

> It would make thinking about finance much easier if you could directly convert a stock to a flow and vice-versa. Can you explain this please? Because I can't really see how converting stock to flow and more specifically flow to stock makes thinking abut finance easier. But the idea seems interesting, what am I missing?

justincormack 4y ago

The UK had some outstanding until recently, but I don't think there are any left https://www.gov.uk/government/news/chancellor-to-repay-the-nations-first-world-war-debt https://www.gov.uk/government/news/chancellor-to-repay-the-n...

OscarCunningham 4y ago
My understanding is that all British consols were callable; the government had the option to force redemption of the bond at a fixed price. This means that they're a slightly more complicated product than the direct stock-for-flow exchange that I'm imagining.

robocat 4y ago

A perpetual bond with no inflation adjustment only really makes sense in a zero inflation environment. The mathematical Net Present Value is $20000 for a perpetual cash flow income of $1000 every year with 5% inflation. (convergent infinite geometric series). In most cases any income further than some decades away should be valued at near zero - stocks due to market risk - even government bonds are not risk free. The future is volatile.

ghaff 4y ago
It "makes sense" to the same degree a 30 year non-callable bond makes sense--which is a long time but, in the US, 30-year fixed mortgages are obviously quite common.
- Retric 4y ago
  You can directly compare the net president value at issuance of a a 30 year loan at 6% that repays it’s principal vs a infinite loan that doesn’t assuming say 2% inflation rate. However when you realize managing loans isn’t free and neither 2% inflation nor perpetual repayment is guaranteed; getting the principal back starts to look even better.