[HN Gopher] Yale's 367-year-old water bond still pays interest (...
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Yale's 367-year-old water bond still pays interest (2015)
Author : marc__1
Score : 121 points
Date : 2021-03-23 16:33 UTC (6 hours ago)
(HTM) web link (news.yale.edu)
(TXT) w3m dump (news.yale.edu)
| alister wrote:
| > _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.
| thaumasiotes wrote:
| > 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...
|
| Those flyers depend on a high-interest environment. At 1%
| annual interest (0.083% monthly interest), accumulating
| $1,000,000 by saving $75 / month would take just over 3,000
| months, or 250 years.
|
| Your deposits would only total about $225,000 over that time,
| so the "magic" of compound interest is still apparent, but it
| doesn't make for a compelling sales pitch.
|
| "Quintuple1 your money in just 250 years!
|
| 1 Almost."
| llampx wrote:
| Well they've gone from using their savings accounts in the
| calculations to just putting everything into the stock
| market, usually the S&P 500.
|
| Its a win-win - they get to charge higher transaction fees
| and management fees if its their own product, and the recent
| bull market makes the customer think they're going to get 7%
| returns forever. Just as long as they don't need to withdraw
| their money during a recession.
| sokoloff wrote:
| The _worst-ever_ 20-year return for the S &P 500 index was
| +6.4% per year. It's not the recent bull markets convincing
| investors that 7% returns will come forever. It's an
| incredibly long history of such returns.
|
| https://www.thebalance.com/rolling-index-returns-4061795
| jaredtn wrote:
| That data looks at January 1979 to present. I believe
| _ever_ includes the rest of the 20th century as well...
|
| There was certainly a negative return over 20-year
| periods including the Great Depression.
|
| And negative real returns during the 1970s stagflation.
| loeg wrote:
| To a reasonable approximation, no financial planner is
| telling anyone to sock away their money exclusively in a low-
| interest savings account. Stock historical yields are well in
| excess of 5%, which changes the math substantially. Even the
| 3-4% "secular stagnation" fearmongering that was all the rage
| five years ago improves the math substantially over the 1%
| figure you've chosen.
|
| $75/mo is definitely too low for a realistic time horizon,
| though. $500/mo at ~5% for 45 years (e.g., working 20 to 65)
| gets you >$1mil, with 270k basis.[0]
|
| [0]: https://www.investor.gov/financial-tools-
| calculators/calcula...
| justinsaccount wrote:
| You just need to freeze yourself for 1,000 years..
|
| https://www.youtube.com/watch?v=g9Z4d5EOjGs&t=27s
| coliveira wrote:
| 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?
| markvdb wrote:
| This bond still yielding is an anomaly though. Instability
| will often manifest as inflation, but not always. Any idea
| which current countries have not experienced revolution,
| hyperinflation, annexation, and more intense events than just
| low or moderate inflation?
|
| https://upload.wikimedia.org/wikipedia/en/8/88/The_Hanke_Kru.
| .. is a good starting point.
|
| I started making a list of countries where you could
| reasonably be expected to have lost all your monetary savings
| at some point in the last 100 years. Not a full list yet, but
| quite impressive already. It's at https://imgur.com/a/gczjp4y
| .
| cheriot wrote:
| Only because you're talking about a bond with fixed payments.
| Operating companies (stocks) handle inflation better because
| they can raise prices.
| coliveira wrote:
| 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.
| [deleted]
| cheriot wrote:
| 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.
| coliveira wrote:
| You'll have a hard time finding companies that pay decent
| dividends and at the same time have high growth
| prospects.
| dmurray wrote:
| Around the developed world, interest rates are at a historic
| low over the last 20 years or so. The EU borrows at 0%.
| Argentina issued a 100-year bond at 8%, for God's sake.
|
| One way to tell this story is that investors have unprecedented
| trust in global stability. They rate the risk of wars,
| bankruptcies, revolutions, etc extremely low.
|
| There are other interpretations: you can say that central banks
| keep interest rates artificially low through control of the
| money supply, or compel investors to buy government bonds at
| artificially high prices, and both are reasonable arguments.
| But treating a price as a function of both supply and demand, I
| think there's a lot of truth in the "peaceful, stable"
| interpretation.
| smolder wrote:
| I think there's "trust in global stability" and then there's
| "trust that none of this will matter anyways if the global
| economy destabilizes". It's too big to fail.
|
| I worry that people's trust in the system also creates apathy
| about the things that can break it. The tragedy of the
| commons is alive and, well... tragic.
| TimTheTinker wrote:
| > none of this will matter anyway
|
| That's a bit of a self-fulfilling prophecy.
|
| What I mean is that the mindset that "none of this will
| matter anyway if <foo>" injects some measure of irrational
| optimism into the economy, causing the relative economic
| severity of the occasional inevitable blip to _increase_
| somewhat.
|
| We'd all do well to rationally consider the (small) risk of
| widespread destabilization. Doing so may keep bubbles
| smaller, but that's a _good_ thing insofar as they _are_
| bubbles relative to value.
| [deleted]
| vmception wrote:
| The central bank cannot actually stem the tide in a loss of
| market confidence, central bank actions all depend on people
| retaining confidence in the currency to begin with.
|
| If a central bank wants to buy government bonds from all the
| sellers and government treasury, it is always purchasing by
| diluting the currency. Once the market gets tired of
| bagholding the currency then central bank has outlived its
| utility and the government cannot sell anymore bonds because
| all the sellers evaporated.
| colechristensen wrote:
| Trust hasn't much to do with it, there are people with much
| capital and nowhere to put it accepting anything.
| nradov wrote:
| It's not that investors have trust, it's just that there's no
| alternative.
| dmurray wrote:
| People say this, but I didn't consider it worthy of being
| mentioned as a serious reason. You can invest in stocks or
| commodities or real estate or these days cryptocurrencies.
| They all have great historic returns but some people and
| some institutions instead lend their billions to the
| world's governments at such low prices. You can't say with
| a straight face that there are no other plausible
| investments.
|
| You could tell the opposite story: bonds continue to be
| popular and pricy because the world fears instability: that
| any other asset class may be in a bubble and about to lose
| all its value. But even then, investors are saying that
| though companies and industries may rise and fall, the
| countries will survive and pay their debts.
| lumost wrote:
| Given rising debt loads, this view seems myopic. Presumably
| if the balance of foreign debt outweighs the risks of walking
| away from it - countries will eventually walk away from it.
|
| It may simply be that revolution or other political
| instability will be required prior to countries walking away
| from the debt.
|
| I'd doubt any major power could or would fight a debt war in
| the 21st century.
| thescriptkiddie wrote:
| I'm not sure that math actually checks out. By my math, you'd
| need to save more like $600 a month starting at age 22 to
| accumulate $1 million by age 65 (assuming 5% annual returns
| after inflation).
| cheriot wrote:
| When was the last time a single cataclysm affected every
| financial market at the same time? We have a greater ability to
| diversify now than anyone did 100 years ago.
| oceanghost wrote:
| A year ago?
| cheriot wrote:
| It's not a cataclysm when markets recover in 6 months. OP
| is talking about getting wiped out.
| nradov wrote:
| In practice diversification has actually gotten harder for
| most investors. The correlation coefficient between all major
| asset classes during periods of high volatility has increased
| across the board. Investors have had to move into riskier
| illiquid assets in pursuit of uncorrelated returns.
| sickofparadox wrote:
| 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 Quite an interesting
| video, definitely worth a watch!
| gpvos wrote:
| 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.
| __initbrian__ wrote:
| 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-f...
| daneyh wrote:
| 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 wrote:
| 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.
| tjalfi wrote:
| This reminds me of the story[0] of a French annuity from 1738
| that yields 1.20EUR per year.
|
| [0] https://news.ycombinator.com/item?id=26559687
| fortran77 wrote:
| 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 wrote:
| 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...). 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 wrote:
| 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 wrote:
| A person upthread mentions that sometimes these bonds are
| also long term - Disney and Coca Cola have issued 100 year
| bonds.
| kennywinker wrote:
| 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!
| ijidak wrote:
| 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...
| RobRivera wrote:
| 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.
| garmaine wrote:
| 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.
| pjdemers wrote:
| 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)
| PLenz wrote:
| 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 wrote:
| They often refer to rents paid by tenants on the estate.
| Aperocky wrote:
| 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.
| CapriciousCptl wrote:
| 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.
| ArnoVW wrote:
| 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 wrote:
| 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
| IkmoIkmo wrote:
| > 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.
| tantalor wrote:
| > simply taking the payment divided by the interest rate to
| discount it with
|
| Looks right, but do you have a proof?
| smabie wrote:
| We have an infinite series such as:
|
| S = sum from (i=1) to infinity of [a^i]
|
| we can then multiply by a on each side:
|
| aS = sum from (i=1) to infinity of [a^(i+1)]
|
| Simplify/cancel out to:
|
| aS = S - a
|
| a = S(1 - a)
|
| S = a / (1 - a)
|
| where a = 1 / (1 + R)
|
| so $100 perpetuity with R = 5%:
|
| a = 1 / (1 + 0.05) = 1 / (1.05)
|
| $100 x (1/1.05) / (1 - (1/1.05)) = $100 x 1 / (1.05 - 1) =
| $100 / 0.05
|
| = $100 / 5%
|
| = $2000
| thaumasiotes wrote:
| > In essence an infinite set of future payments has a finite
| present value, due to inflation.
|
| Inflation counts, but this would still be true in the
| presence of strong deflation. A set of future payments has a
| finite present value due to the fact that the same amount of
| purchasing power is worth less in the future than it is right
| now, "time discounting".
| bawolff wrote:
| Well we have a constant rate of inflation in modern times,
| how true was that 300 years ago?
| boltzmann_ wrote:
| > constant
|
| Yeah about that..
| tantalor wrote:
| Do you know what website you're on? You should have used $128
| or $256.
| WJW wrote:
| Real hackers are not limited to numbers that are powers of
| two.
| TimTheTinker wrote:
| Real hackers maintain their ability to hack decimal
| architectures.[0]
|
| [0] https://en.wikipedia.org/wiki/IBM_7070
| tzs wrote:
| > 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.
|
| Is it really due to inflation?
|
| Even without inflation, wouldn't there still be interest on
| loans to compensate the lender for not having the use of
| their money and for the risk that the loan will not be paid
| back. The present value of a future payment would thus still
| be discounted, and a stream of payments under a fixed
| interest rate would still lead to a convergent geometric
| series for the present value of the total stream.
| lordnacho wrote:
| Yes it's due to the interest rate, which is loosely
| connected to inflation. But you're right, even with no
| inflation, you'd discount by future interest rates, leading
| to a finite number.
| lostlogin wrote:
| 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
| Scoundreller wrote:
| 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.
| dougmany wrote:
| 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.
| wahern wrote:
| 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.
| mywittyname wrote:
| 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.
| golergka wrote:
| Isn't it practically investment?
| howeyc wrote:
| 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 wrote:
| The price of the bond itself is at least 100x the value it
| would have to pay for eternity
| mminer237 wrote:
| 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.
| cameldrv wrote:
| 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.
| kchoudhu wrote:
| CUSIP?
| Ericson2314 wrote:
| If only there was a temperature clause so when the gulf stream
| fails the bond is void.
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(page generated 2021-03-23 23:00 UTC)