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Sunday, July 4, 2010

What do current bond yields and war bonds from WWII have in common?

They pretty much share the same interest rate. That's right. I calculated the effective compounded interest rate of war bonds sold during WWII to be 2.91% for a ten year instrument while current ten-year notes are trading at 2.98%. So, current market forces have pushed interest rates on government bonds so low that they're, well, downright patriotic allowing the government to borrow money so cheaply.

It makes me think of this WWII-era commercial for war bonds:

By the way, calculation was based on the following information. You could buy a bond that matured in ten years at $25 for $18.75. So, the calculation is ((25/18.75)^(1/10)) which is the good old fashioned compounded annual growth rate formula for those who are interested in such things.


  1. You had to pick this particular war bond advertisement, of all the war bond advertisements out there. I know you, and I know why this one was chosen.

    P.S. It being the July 4 weekend, is it our patriotic duty to purchase bonds? Our goal here is to make money. Is it fiscally responsible at our youthful and tender age to buy anything promising such an awful return?

  2. I think one should always have some bonds in their portfolio and ideally no less than 20%. I've been guilty of tapping into that 20% before and I've found that's been to my detriment more often than not. The problem I have with initiating a position now is that you seem so certain to lose money. I guess if you hold to maturity you won't lose money, but still.

    The upshot of that is, initiate a bond position once interest rates are closer to 4%, but not now. Of course, if we go the way of the Europeans and suddenly fall in love with austerity, what the hell, go for it. We'll have deflation as far as the eye can see then.

  3. Incidentally, there are actually even more offensive ones out there than this one, even with that little Al Jolson blackface routine. I almost want to re-edit it just to cut that part out because it's a perfectly okay ad other than that needless little bit there.

  4. Well, it's only offensive in the affectionate, Looney Tunes sort of way.

  5. Good ol' fashioned family friendly racism.

  6. Thanks. I have been trying to find the rate on 18.75 cent war bonds for about 30 minutes. Only you had the answer. AOL finance even claims the sold for 17.50 and matured after some time another site said they sold for 18.75 but paid 15 dollars after 10 years. Really smart to buy a bond that pays a negative interest rate. I know or hope they meant 25 but the only site I booked marked was yours and with this i ended my search. My rough guess was 2.6. Thanks for the cartoon