Comment by fsckboy | Hacker News Reader

Comment by fsckboy | Hacker News Reader

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the view you are describing could be described as (or at least, i would describe as) "newtonian" interest/inflation, where modern thinking is more "einsteinian".

the interest rate of a bond isn't just "liquidity/the time value of money", it also contains expectations for future inflation rates. However, we never know the future, so inflation risk cannot be eliminated/hedged by any means, so being "wrong" about the future might harm or reward you.

furthermore, by portfolio theory, you would have needed to reinvest all the interest received from this bond immediately upon receipt as part of your evaluation of the performance of the bond (which, that being difficult to do is why we evaluate bonds at "present value"). All those past interest payments made would have been reinvested at prevailing (e.g. so-called "inflationary") rates and might have done extraordinarily well.

If you include all factors, this bond might have been the best investment she could have made, and it would be wrong to describe it as somehow "ravaged by inflation"; with nothing any better to do with her savings, it's the idea that money is somehow "fixed" and potentially permanent unless "eroded" that we should see as damaged, not the value of this bond.

I think a more nuanced take would simply be that the long tail of a perpetual bond is unlikely to be worth that much, which is why these days bonds with extremely long maturities aren’t issued.

I think I was taught that perpetuities were banned because of the legal/accounting woes they create in the future.

As an example, the reason that coupons (like $1 off a box of Wheaties) or refunds (good for 1 airline ticket) and similar "financial instruments" have expiration dates on them is because it is required by accounting rules. When those items are issued, companies need to put them on their books as liabilities, and having to keep around an ever increasing accumulation of liabilities for many years would give a "wrong" picture of the financial health of the entity, when the purpose of books is to give a "right" picture.

(your take is not more nuanced, it acknowledges this practicality aspect. to extend the newtonian/einsteinian analogy, you're advocating ignoring the ∆x² term as the lim ∆x→0 version of the calculus derivative rather than the approach taken by analysis :)

Hm interesting. I think that would also explain why they make gift cards expire or lose value over time, even though, if anything, they should be paying you interest because you’re giving them a(n otherwise) free loan.

The catch is that the interest-free loan can be called in by you, the gift card holder, at any time - so they get less utility from any given amount of gift card balances than they would loans/corporate bonds of the same amount because they're always trying to be prepared to pay out some portion of those balances.

This is why they're treated as a liability in the company books. You can guess or bet that all of your outstanding gift card balances won't be redeemed at once, but there's really nothing preventing that from happening and causing cashflow problems for the company. And there's lots of overhead involved in tracking many many thousands of small balances on cards into perpetuity.

Much easier to encourage people to spend the gift cards and get your financing from proper, predictable business loans or bonds.

Most of that is irrelevant here. All they have to do is put in an interest bearing account, and pay out some amount less than they're earning. Furthermore, they will effectively owe you less than even the principle since they (on average) sell the goods for more than they cost. You're forgetting that this liability comes with an over-offsetting asset.

Then, if they have any wiggle room, they can get a further increase by buying back a bond of higher yield sooner, modulated by expected cash flows.

>Much easier to encourage people to spend the gift cards and get your financing from proper, predictable business loans or bonds.

That doesn't follow at all. The longer the gift card goes without being spent, the more free money they get. There's no net benefit to the goods being called sooner.

Any large issuer of gift cards has an income stream from gift card breakage to the tune of a few percentage points of their outstanding gift card obligations each year.

Imagine a business where people give you cash and don’t ask for 5% or so of it back. Meanwhile your use of that cash is regulated with a feather (compared to a bank or other deposit-taker) and you can earn some yield while you wait for people to ask for their money back.

Gift cards are very lucrative at scale.

The relatively short validity period of gift cards makes them more profitable for the issuer because a substantial minority of them are not redeemed before the expiry date.

Not really. Gift cards don’t expire and you’re allowed to just make reasonable assumptions about what portion will never be redeemed.

Gift card expiration used to be really egregious. In 2010 that changed in the US. They can still expire, but not within 5 years.

https://www.ftc.gov/news-events/news/press-releases/2010/11/...

Regardless, you can still account for breakage without any formal expiry

Sure. That Party City gift card bought last week may not be honored today due to bankruptcy and certainly won’t be honored after the stores close in a couple months.

No, that argument applies to the owner of the gift card accounting for the fact that the gift card may not be used (and isn’t a great method assuming they intend to spend it and expect to get the full value).

What I’m talking about is the provider of the gift card writing off some portion of the liability of gift cards they have sold that people will never spend because they forget about them and lose them and so forth.

In Washington state they never expire.

On a long enough timeline, every perpetual guarantor defaults.

The benefit to perpetuals is all bonds trade in the same pool regardless of issuance.

So, here’s the thing about 400-year bonds: they’re weird. Most sovereign entities don’t even last 200 years, so issuing one feels less like a financial plan and more like performance art. But sometimes these things actually make sense. Take Elsken Jorisdochter: she bought a bond for 1,200 guilders, got 75 guilders annually (tax-free, mind you), and after 16 years, it was repaid. Not bad.

But this wasn’t just finance for finance’s sake. The bond funded flood protections for the dangerous, waterlogged land where she and her family lived. It kept her community safe. Yet all people talk about is, “Wow, she bought a really old bond!” No, she made a real investment in her family and neighbors’ future. The 400-year part? That’s just the headline.

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