Hey, I Used to Own One of These!

Somebody--Yglesias?--was talking about War Bonds in World War II. Hey, I used to own one of these! Given to me for my--seventh? eighth?--birthday. The face was $18.75 and the maturity was 10 years with a maturity value of $25. This all looked like pretty heavy sugar to me but I suspected--correctly, as it turned out--that I'd never see any of it. Probably went for something silly like education.

My recollection is that it was a 10-year term bond. I've long assumed it was a pretty terrible investment, but here's something I didn't know how to do in those days: extract the 0.1th root out of that series and you have the implied annual rate. So (25/18.75)^(1/10)-1 = just a shade under three percent. The CPI Calculator shows me that the inflation rate starting in 1943 was about four percent. So, it is a loser.

But wait, folks. Flipping through my copy of Homer and Sylla A History of Interest Rates (I knew I would be glad to have this book someday), I find that the yield on a prime corporate bond in February (birthday month!) 1943 was 2.57 percent--in 1944, just a gnat's eyebrow different, at 2.56 percent.

So the government bond was actually better than a corporate (and come to think of it, as I recall, the income on each was taxable).

Meanwhile, if I count right, the return on the Dow was about seven percent annual, without counting dividends. But there is that pesky business of capital gains...