It depends! Let’s say a 8% Treasury exists and you want to buy it today. To establish its price, you need to know:

• What is today’s yield curve? (i.e., what is the market’s expectation for interest rates at different points in the future?)
• When does the bond mature? (i.e., how long until the face value of the bond is paid out back to the bond holder?)
• How frequently does the bond pay interest payments (coupons)?

I’ve put together a quick calc based on Federal Reserve yield curve data as at 27 Sept, assuming an 8% Treasury maturing in exactly 20 years, with semi-annual coupons (as most government debt is semi-annual). Google sheet calc

If you bought $3m worth of this fictional bond today, you would own $1.95m notional of the bond. You paid $3m for $1.95m of US gov’t debt effectively because the bond was issued in the past at a higher yield that what the market is expecting the government to issue bonds at in the future.

Every 6 months, you would receive a coupon of c. $78,000, or effectively $13,000 per month. This is interest the gov’t pays you for having lent it money (or rather having bought the debt from whoever lent it money.) These payments are guaranteed as long as the US gov’t remains solvent.

Finally, in 20 years’ time, you would also receive the principal payment of $1.95m. This is the government paying back the amount it originally borrowed. Note that it will likely be worth significantly less in real terms in 20 years!

Importantly, you don’t have to hold the bond to maturity and wait 20 years to get your $1.95m. Just like you bought the bond at a bid price of $3m today because rates are lower than the coupon yield of the bond, if the yield curve decreases further, the price of your bond in the open market will increase. E.g., if yields went down 1% across the curve, your $3m investment would now be worth $3.4m and you could sell it for a tidy $400k profit!

This is a person who doesn’t understand how the fixed income market works.

He’s assuming he’s buying $3m notional of a bond yielding 8% and paying for the face value $3m (i.e., he’s buying it at par). This is not how it works, even if you’re somehow subscribing at issuance as a retail investor.

You’re going to be buying the bond at bid, which is going to be higher than par when prevailing future yield expectations are lower than the coupon rate of the bond.

TL,DR: You can’t buy $3m of a high-yielding sovereign bond for $3m today. You’ll get less of the bond for the money if it’s yielding more than the market is expecting base rates to be in the future.

Eine wahre Explosion aus der Vergangenheit!

Ist das etwa Boxxy? In deinem Thumbnail?

I try to predict the future in order to find a way for us to invest the money universities have given us that ensures we can pay scholars a modest wage once they’re too old to work. The goal is to not run out of money before the last scholar dies.

I’m a stochastic Asset Liability Modelling specialist in the financial and investment risk function of the asset management company of a pension plan for the university sector.

Stock markets and securities had already existed in various forms for centuries, but pensions and insurance are really more of 19th century phenomenon, as are probabilistic views of the world (closely related). Stochastic analysis is a 20th century beast, and multidimensional non-linear optimisation in financial mathematics is a relatively recent 21st century development!

Als Tscheche möchte ich mich dafür bei den ganzen Ländern entschuldigen. Das ist echt nicht unser Ernst.