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Long-term treasury bonds aren’t like stale bread because the bread doesn’t suddenly spring back to its original edible state after ten years have passed, but th
by pavlov 4y ago
Long-term treasury bonds aren’t like stale bread because the bread doesn’t suddenly spring back to its original edible state after ten years have passed, but the treasuries will eventually repay your capital in full.
The problem is that this full repayment is a decade or more away, and in the meantime you’re receiving a pittance of interest compared to investments you could make today. So if you can’t afford to wait, the bonds you’re holding aren’t worth their full value to anyone you could sell them to.
- toast0 4y ago> So if you can’t afford to wait, the bonds you’re holding aren’t worth their full value to anyone you could sell them to. Bonds are easy to value if you assume full timely repayment, take the net present value of each payment, and that's what it's worth. (You may disagree about the NPV, if you disagree about the interest rate to use, but the shape of the calculation is clear) Sure, at redemption, it will be worth something else, but USD today and USD in a year are not the same unit, you need a conversion.
- LudwigNagasena 4y agoThe problem is that this full repayment is just objectively not a full repayment. In a standard economic environment with a positive rate of inflation, if I gave you $10 yesterday, and you returned me $10 today, I _lost_ money even though the numeraire suggests that I didn’t.