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Perpetual Bond

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Re: Perpetual Bond

#11

Post by slavboj »

chillpenguin wrote: post #10

The TLDR for how a bond that continues to pay interest forever can be valued at less than infinity dollars is due to the "time value of money", which states that $X in the future is worth less than $X today. This makes sense intuitively if you consider that if you had that money today, you could invest it and earn interest on it. So since money in your hands is worth more than that same amount of money in the future,…

Default risk (either outright or de facto) is also extremely present. Most countries (including the US, cf Roosevelt's abrogation of gold-denominated debt) have defaulted at various times.

Re: Perpetual Bond

#12

Post by karpierz »

skybrian wrote: post #9
prionassembly wrote: post #6

Thus money and capital are different things with different cardinalities. (More: https://asemic-horizon.com/2021/07/31/zero-chroma-infinity/ )

That's just confusion about discount rates. Money in the future is worth less than money in the present, so an infinite sequence can have a finite sum when it's priced in today's money.

That is true, but the pertinent question is: how much less?

If the world is ending tomorrow, then much less. If we discover immortality tomorrow, then much more.

Re: Perpetual Bond

#13

Post by ohyoutravel »

chillpenguin wrote: post #10

The TLDR for how a bond that continues to pay interest forever can be valued at less than infinity dollars is due to the "time value of money", which states that $X in the future is worth less than $X today. This makes sense intuitively if you consider that if you had that money today, you could invest it and earn interest on it. So since money in your hands is worth more than that same amount of money in the future,…

Thanks for the explanation, I saw the formula in the OP for pricing it and it seemed like using that simple formula, the price should be infinity. I came to ask about that and your comment answered the would-be question. Thanks!

Re: Perpetual Bond

#14

Post by JumpCrisscross »

ohyoutravel wrote: post #13
chillpenguin wrote: post #10

The TLDR for how a bond that continues to pay interest forever can be valued at less than infinity dollars is due to the "time value of money", which states that $X in the future is worth less than $X today. This makes sense intuitively if you consider that if you had that money today, you could invest it and earn interest on it. So since money in your hands is worth more than that same amount of money in the future,…

Thanks for the explanation, I saw the formula in the OP for pricing it and it seemed like using that simple formula, the price should be infinity. I came to ask about that and your comment answered the would-be question. Thanks!

> seemed like using that simple formula, the price should be infinity

Deriving the value of a perpetuity is simple but revealing [1].

[1] http://fahmi.ba.free.fr/docs/Courses/2012%20HEC/FBA_FE_Chap1...

Re: Perpetual Bond

#15

Post by [deleted] »

karpierz wrote: post #12
skybrian wrote: post #9

Earlier quoted context omitted.

That's just confusion about discount rates. Money in the future is worth less than money in the present, so an infinite sequence can have a finite sum when it's priced in today's money.

That is true, but the pertinent question is: how much less? If the world is ending tomorrow, then much less. If we discover immortality tomorrow, then much more.

[deleted]

Re: Perpetual Bond

#16

Post by JumpCrisscross »

slavboj wrote: post #11
chillpenguin wrote: post #10

The TLDR for how a bond that continues to pay interest forever can be valued at less than infinity dollars is due to the "time value of money", which states that $X in the future is worth less than $X today. This makes sense intuitively if you consider that if you had that money today, you could invest it and earn interest on it. So since money in your hands is worth more than that same amount of money in the future,…

Default risk (either outright or de facto) is also extremely present. Most countries (including the US, cf Roosevelt's abrogation of gold-denominated debt) have defaulted at various times.

> including the US, cf Roosevelt's abrogation of gold-denominated debt

How is Roosevelt abrogating America’s gold standard a counterfactual to default risk?

Re: Perpetual Bond

#17

Post by rkagerer »

barry-cotter wrote: post #7
rkagerer wrote: post #4

An example from the article of one of the oldest perpetual bonds still paying out: https://indroyc.com/2015/09/17/a-367-year-old-bond-still-pay... It's written on goat skin and must be physically presented in the Netherlands to collect interest of 11.34 euros per year. Yale University bought it in 2003 for 24,000 euros. One part I don't understand: According to its original terms, the bond would pay 5% interest in pe…

> How's that work? Did the bondholder agree to new terms or did the issuer just unilaterally "change" them? The government can always unilaterally change the terms. That’s the defining feature of a government, the monopoly on the legitimate use of force. See when the US went off the gold standard [1]. [1] https://www.history.com/this-day-in-history/fdr-takes-united...

But it's not government issued (or at least not by any "federal" level agency).

Per https://news.yale.edu/2015/09/22/living-artifact-dutch-golde...

The bonds were issued by the Hoogheemraadschap Lekdijk Bovendams, a water board composed of landowners and leading citizens that managed dikes, canals, and a 20-mile stretch of the lower Rhine in Holland called the Lek. (Stichtse Rijnlanden is a successor organization to Lekdijk Bovendams.)

Re: Perpetual Bond

#18

Post by milkshakes »

JumpCrisscross wrote: post #16
slavboj wrote: post #11

Earlier quoted context omitted.

Default risk (either outright or de facto) is also extremely present. Most countries (including the US, cf Roosevelt's abrogation of gold-denominated debt) have defaulted at various times.

> including the US, cf Roosevelt's abrogation of gold-denominated debt How is Roosevelt abrogating America’s gold standard a counterfactual to default risk?

https://en.m.wikipedia.org/wiki/Cf.

Re: Perpetual Bond

#19

Post by seoaeu »

throwaway6745 wrote: post #8

Property giving rent is behaves a inflation adjusted bond - in the long run the rent will increase along with inflation, while the coupon payment of perpetual bond stays constant (reduces in value due to inflation over time). Both perpetual bonds and property price will increase when interest rates fall.

No, property is far more risky than that. However even if nothing goes wrong, revenue tracks local rents, not overall inflation

Re: Perpetual Bond

#20

Post by JumpCrisscross »

milkshakes wrote: post #18
JumpCrisscross wrote: post #16

Earlier quoted context omitted.

> including the US, cf Roosevelt's abrogation of gold-denominated debt How is Roosevelt abrogating America’s gold standard a counterfactual to default risk?

https://en.m.wikipedia.org/wiki/Cf .

Whoops! Thanks!
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