The Bridgeport times and evening farmer. (Bridgeport, Conn.) 1918-1924, 1918-01-16
LIBERTY BOND
LESSONS
By HOWARD SPEER
Of Hincks Bros. 6 Co.
LESSON NO. IS
MAGIC FIGURES
MAGIC FIGURES

mere is an old saying that figures
can lie. Of course, some clever chap
ilad 10 come along and improve on it
Wy aouang, No, but liars can figure"
30 when you saw in the last Liberty
6ond lesson the statement that Lib
cray 1-2s would sell higher than the
IS and yet yield the same return to
the buyer you probably thought that
one OF those short and ugly fellows
mad been sharpening his pencil.
we have all watched the profess
slonal magician do his impossible
stunts, like smashing a gold watch
into bits and then making a live rab-
DIT out of the pieces, and other things
equally mystifying. If you nave ever
succeeded in getting one of those
trlcksters to show you how he really
does it, you have, of course, been
amazed at the simplicity of the whole
performance.
Well, the magic that makes a 3 ~
per cent. bond yield the same return
as a 4 per cent bond and yet sell at
hlgher price is just as simple
Let's clear away the ground for this
httle trick by removing all possible
Misunderstanding. You remember
that some time ago we said that the
IL per cent. Liberty Bonds would
sell higher than the As, because they
were tax exempt and therefore the
rich men would want them and by
buying them would force the price I'D.
But we didn't say that they would
continue to yield as much as the 4lS
90 don't confuse that statement with
the one we are making now. Our
present statement is that even if the
ponds were alike in taxation the
1-2s could sell higher than the As
and still yield as much.
Let's go back to school, If a man
buys a house for $4,000 and gets $500
year from it how much does he get
on his investment? You get the an
sWer, of course, BY finding 1 per cent.
of $6,OOO which is $50, and then divid-
ing it into $500. It goes five times,
therefore he makes per cent.
Now it would seem that you could
use the same process on any kind Of
an investment. Suppose you buy a
$1,000 bond bearing 6 per cent. interest
and that you pay 120 per cent or
Sl,ZS0 for the bond. You get $50 year
from the bond and $50 is per cent. of
$l,2OO, so you assume that you are get
ting per cent. on your investment.
But not so fast! A bond is a debt,
1t falls due on some definite date in
the future and will then be paid off
at its face value without regard to
what you may have paid for it. Sup
pose your per cent. bond comes due
IN 10 years. In 1928, then, the debt
will be paid and you will receive
$1,000. But you paid $1,000, so YOU
nave lost 5000 in the ten years, or an
average loss of 500 a year. Now $40
is % per cent. of your original in
vestment of $1,000. You must there
lore substract this average yearly
loss of % per cent. from your ap-
parent yield of 5 per cent and as a
result you find that you are really get
ting only IL per cent. on your
If that bond should come due in
TOUR years your average yearly loss
would be $50 or 4 is per cent. of YOUR
$1,000. When you subtract this from
the 5 per cent. you have left only SIS
of L per cent. as your real return on
your money.
If the bond should come due in %
years your yearly loss is only 81 which
is only 1-3 of 1 per cent. of 81. 200.
Therefore your final yield is 4 2-3 per
cent.
You see, therefore, that when you
pay more than the face value for a
pond you are bound to lose something,
and, unless you wish to fool yourself,
you must take that loss into consider
alton in figuring the yield on your
You see also that in such case the
longer the bond has to run before he
ing paid off the higher your yield will
be on any given price.
You begin to understand now, don't
you, how two bonds might bear the
same interest rate, sell at very diff
ferent prices, and yet yield the same
return, simply because one of them
would have a longer time to run? In
the same way it is perfectly possible
for one bond to have even lower in
terest rate than another, yield the
same return as the other, and yet sell
at a higher price All that is neces-
sary is that it shall have enough
longer life to make up the difference
that would otherwise exist between
their yields.
And that is exactly the case with
Liberty 3 1-2s and Liberty As The
As come due in 1912, but the 8 1-2s
run until 1947. The government has
the privilege of calling in the As and
paying them off in 1927 if it wishes to
do SO, but in the case of the 8 1-2's it
has to wa until 1882 to pay them off,
no matter how much money it might
have for the purpose before that date
So, from any point of view, the
8 1-2 per cent. bonds have five years
more to live than the 4 per cent. issue
and can therefore rise in price to just
that extent.
We may have more to say to you
on this matter of prices, but most of
US never did like arithmetic anyhow
and you have probably had enough