The 100-Year Bond

     Bonds maturing a century from issuance have been around for a while, and there are a bunch of them.  Walt Disney and Coca-Cola debuted the idea in 1993, and over the years those names were joined by the likes of IBM, JCPenny, Ford, BellSouth, Norfolk Southern, MIT, and Boston University.  This year, Mexico and Petrobas followed suit.  While totally understanding why any debtor would love to issue 100-year bonds, we've occasionally wondered what kind of nut case could possibly want to buy one.

     Lets say the fruitcake drops $10,000 on a century bond yielding 6%.  He'll get paid $300 in interest twice a year for 100 years, and receive $10,000 in principal on maturity.  Well, his heirs will.  Or theirs.  Maybe.  Lets just assume somebody in the fruitcake family receives it, all right?  Anyway, what are the pack of them actually getting from the entire 100-year bond investment?

     As it happens, $30 turns out to be the approximate price of our favorite 12" stuffed Chicago-style pizza at a popular pizza joint here in the extended neighborhood.  (We actually tend toward Tony's Italian Deli at the moment, but Tony's relevant large pie is way less expensive so the Chicago-style numbers work out better for this example).  The $30 pizza we're talking about is the Heart Attack Special.  It comes with sausage, pepperoni, prosciutto, roast beef, and extra cheese, and "due to the immense depth ... will take a few extra minutes", which explains the thirty bucks, including sales tax.  Our example excludes tip because we always do take-out with local pizza.

     Ergo, that $300 coming in semi-annually from the century bond covers 10 Heart Attack Specials over the six months funded by the first payment.  Only that's today.  What about tomorrow and tomorrow and tomorrow?  There's that dimly distant maturity date and all those intervening tomorrows.  What about them, huh?

     Forget the intervening tomorrows.  Once you hear about the last one and that accompanying $10,000 payment on maturity, you won't care about the intervening tomorrows.

     In a study done a couple years ago, somebody concluded that 100 years of inflation increased prices by somewhat more than 2,000% over the century ending about now.  Turning that into 2,100%, we find that Heart Attack Specials at our popular extended-neighborhood pizza joint would cost $630 apiece in the year 2115 under the same inflationary conditions.  And the fruitcake family, still receiving $300 twice a year from their century bond, will have to save up both semi-annual payments and add $30 to buy one Heart Attack Special a year, and, get this, that $10,000 principal payment will only snag them 16 more - if they throw in another hundred.

     In contrast, a starting investment of $10,000 in the common stock of an issue that keeps up with our 2,100% inflation assumption would be worth $210,000 after 100 years.  A 6% return on that investment will have risen to $12,600 in annual dividend payments for the common stock investor that year, treating that enlightened family to the century-after-century of Heart Attack Special enjoyment their investment acumen warrants.

     Analysis over.

     Now for who'd want to buy into this train wreck.  Lets assume that the 100-year old bond is a con, and start with the one obvious person of interest - the Wall Street mafioso who'll open a book, take the short side, and dump all the risk in that book on his clients.  The guy who calls victims "counterparties" to make his crooked ways sound legit.

     And if a con, that would bring us down to this guy's suckers.  There's absolutely no way these things would reach market without them - if we're talking about a con.  Suckers are easy to spot.  They're the clients being led around by the nose.  To us then, the whole sordid crime would be lying out in plain sight.  If we had any securities law enforcement, they'd simply grab the book, finger the perps on the short side, ID everyone getting pulled around by the nose, thereby uncovering the fraud pulled on all those victimized counterparties, and take appropriate action.

     If we had any securities law enforcement.  And if the 100-year old bond is a con.

     Just saying ...........