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Old 12-03-2019, 04:05 AM
mitchm is offline
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In 1981, could I have bought $1,000,000 of 30 year US Treasury Bonds at 14.8%?


Could I as in individual have bought one million dollars of 30 year Treasury Bonds in 1981, auctioned at 14.8%, and have thus received approximately 150K/year for thiry years, after which I my million dollars would have been returned?

If so, how would this money have been distrubed to me?
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Old 12-03-2019, 06:31 AM
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According to this link, at the beginning of 1982 the Treasury sold 30 year bonds with a 14% coupon at slightly below par.

That is, you would have paid slightly less than $1 million to buy $1 million dollars worth of bonds that pay out $140k of coupon interest per year. After 30 years you would get the full $1 million back.

Don't know if the Treasury ever sold higher coupon rates. Bond prices are easy to find but I couln't easily find historical coupon rates.

You would buy bonds through your bank or securities broker. I think they would hold the bonds for you in your account there and credit your bank or brokerage account balance with the interest payments.

Last edited by Frankenstein Monster; 12-03-2019 at 06:32 AM.
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Old 12-03-2019, 07:21 AM
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To put that into perspective you'd have collected $150,000 per year for 30 years for a total of $4,500,000, then gotten your original million back. The original million would only have the purchasing power of $335,000 1981 dollars, so it isn't all gravy. The coupon payments over the years would have gradually lost purchasing power as well.

Had you invested the original million in the S&P index in 1981 January 1st you could have bought at 133 and January 1st 2019 it was at 3,115. That'd be worth better than $23,000,000. That's neglecting dividends, which historically average around 4% but which currently languish slightly below 2%, which is pretty paltry, but with a $23,000,000 investment would pay around a half million per year.

Last edited by Bill Door; 12-03-2019 at 07:23 AM.
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Old 12-03-2019, 07:28 AM
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You wouldn't have collected $150,000 per year but $140,000 per year for $1 million of face value. Unless there was an issue with a 15% coupon?
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Old 12-03-2019, 07:41 AM
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Quote:
Originally Posted by Frankenstein Monster View Post
You wouldn't have collected $150,000 per year but $140,000 per year for $1 million of face value. Unless there was an issue with a 15% coupon?
I didn't look up the actual coupon and went with the 14.8% in the OP. I'm sure you're right.

I think it was in 1981 that I got a $1,000 three year CD at 14% interest and they gave me a nice leather suitcase for opening it. It was an actual free suitcase, too, not one of those things where they give you an advance on your interest payments and it comes out of your end. We used that suitcase for more than a decade. We called it the thousand dollar bag.
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Old 12-03-2019, 07:49 AM
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I remember those "high yield" (by today's standards) CDs too.

Here is a nostalgic Reuters article about the retirement of the last 10-plus percent coupon long bond which retired in 2015.
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Old 12-03-2019, 08:54 AM
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You could not.

Prior to 1985 treasury bonds could be called - redeemed early - by the US government. That is, if you held a bond at 14.80% and rates went down to 8% - the approximate rate in 1985 - the government would issue new bonds at 8% and pay off your face value. This occurred whether you wanted it to or not.

So essentially you’d get 14.8% for 4 years and about a 1% bump for having bought the bonds below par.

$1,000,000 invested

$148,000 x 4 = $594,000
+
1% below par bump of $10,000

Total Return: $604,000

Not bad for four years at all but not thirty years of gravy.

https://www.treasurydirect.gov/indiv...tbond_call.htm
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Old 12-03-2019, 09:52 AM
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You could not.

Prior to 1985 treasury bonds could be called - redeemed early - by the US government.... whether you wanted it to or not.
It's annoyances like this that make it hard to be an effective "do it yourself" retail investor.

If it had happened to me, I might be touring Europe enjoying the previous year's $140,000 interest, when the bonds are redeemed unbeknownst to me — few had e-mail in those days — and earning zero interest in a checking account.

(Admittedly $1 million was way out of my league, especially in those days; had I been in-league surely I'd have had some helpmate!)
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Old 12-03-2019, 10:30 AM
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They did have these things called letters back then, which were a bit slower than emails but served the same general purpose.
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Old 12-03-2019, 11:45 AM
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It was a LONG tour of Europe. Moved around a lot. Mail was forwarded to my sister, but she's at least as scatter-brained as I am.
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Old 12-03-2019, 11:53 AM
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Yes, you’d have been notified by mail - either to your home or your broker - about the call. And the money would have been sent by wire or paper check. Heads up.
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Old 12-03-2019, 04:09 PM
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During the budget surplus of the Clinton years, the Treasury bought back quite a few higher interest bonds. This helped things keep rolling ... for a while.

I remember my bank offering 13% ten-year CDs back then. There'd be no buy back for those. Was tempted. Opted not to. Then rates and inflation started coming down. Too late.

Hmm, let's see. That'd be about $2600 of interest on $1000 invested. Less inflation.
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Old 12-04-2019, 10:25 PM
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Quote:
Originally Posted by Jonathan Chance View Post
You could not.

Prior to 1985 treasury bonds could be called - redeemed early - by the US government. That is, if you held a bond at 14.80% and rates went down to 8% - the approximate rate in 1985 - the government would issue new bonds at 8% and pay off your face value. This occurred whether you wanted it to or not.

So essentially you’d get 14.8% for 4 years and about a 1% bump for having bought the bonds below par.
30 yr US treasuries issued in the late 70's and early 80's were callable after 25 yrs. For example the 14%'s of 2006-11 issued in Nov 1981 were called in Nov 2006. So it was 25 years of 14% (plus the capture of whatever discount you bought them at for a yield above 14% v redemption at par) over a period where realized CPI inflation ran at ~3.1%, real return of ~11% pa (though that's before tax).
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Old 12-05-2019, 06:54 AM
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I got a 2 or 3 year CD in the early 80's at 17.4%. Those were the days.
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Old 12-05-2019, 07:16 AM
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I got a 2 or 3 year CD in the early 80's at 17.4%. Those were the days.
...of high inflation. Granted the real rates were probably higher than today but still small single digits.
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Old 12-05-2019, 07:26 AM
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Originally Posted by KidCharlemagne View Post
I got a 2 or 3 year CD in the early 80's at 17.4%. Those were the days.
Unless you were trying to borrow money. Then it sucked.

If I remember correctly the CD rate in the spring of 1980 was something like 17.75. My wife and I stuck most of the money we got from our wedding just 3 months prior. By the time it matured inflation had leveled out and we had a nice nest egg.
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Old 12-05-2019, 12:48 PM
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...of high inflation. Granted the real rates were probably higher than today but still small single digits.
Pre-tax realized real rates from the early 80's on fixed rate instruments were huge. A 3 yr CD at 17.4% in 1981 had a realized real return of around 13.8%, inflation for the next three years was around 3.6%. You can calculate CPI between dates as a multiple here, then do a little exponent math to get the annual % rate of inflation.
https://data.bls.gov/cgi-bin/cpicalc...1&year2=198411

*Expected* real rates as of 1981 were presumably much lower than 13.8%. . Inflation subsided faster than the market expected, almost surely. However prior to the introduction of Treasury Inflation Protected Securities, TIPS, in 1997 there's no reasonably direct* way to look back and say what expected real rate the market believed that nominal rates equated to.

*now we can take the TIPS real yield, say around 0.2% in the region of 10 yrs, compare it to the nominal yield of the 10 yr treasury at around 1.80% and say the market expects inflation to avg 1.6% for the next 10 yrs and that the expected real return on the nominal 10 yr is also probably in the ballpark of 0.2%, two types of bond with the same credit risk, that of US govt. But there are still some apples v oranges aspects to TIPS v nominal treasuries. The latter are more liquid which would tend to imply lower return for nominals, whereas TIPS gtee (more or less) the real return regardless of inflation so presumably that's worth something to investors, implying a lower real expected return for TIPS. Various analytical models try to tease out the size of each of those offsetting yield premia, but as a broad side of the barn estimate the expected real yield on nominal 10 yrs is much more like 0.2% than say 2% or -2%. Back in 1981 the expected real yield on nominal treasuries might have been far higher, to compensate for the then higher risk of apparently out of control inflation. But inflation was quickly brought under control as things turned out, and buyers of nominal instruments ca. 1981 made out very well.

Last edited by Corry El; 12-05-2019 at 12:51 PM.
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