Custom Search

From Here to Eternity

Politicians, you may be aware, are fond of urging people to invest in the future. It would appear that some investors are taking them a bit too literally of late. The latest fad among emerging-market bond investors, eager to get a piece of the action, is to queue up for bonds with 100-year maturities, such as those issued by the Chinese government and Tenaga Nasional, a Malaysian electrical utility.

Not to be outdone by these century bonds, Eurotunnel, the beleaguered company that operates the railway beneath the English Channel, is trying to tempt investors with a millennium`s worth of profits. Last week, in a bid to sweeten the pot for its shareholders and creditors, who must agree on an unpalatable financial restructuring, it asked the British and French governments to extend its operating franchise from a mere 65 years to 999 years. By offering investors some windfall profits, the firm hopes they will be more likely to ratify its plan. Has the distant future become the latest place to make a financial killing?

Alas, the future is not all that it is cracked up to be. Although at first glance 999 years of profits would seem far better than 65 years, those last nine centuries are really nothing to get excited about. The reason is that a dollar spent today, human nature being what it is, is worth more to people than a dollar spent tomorrow. So when comparing profits in the future with those in the present, the future profits must be ¬discounted ­ by a suitable interest rate.

Under the relentless pressures of compound interest, the value of future profits is ground to nothing as the years go by. Suppose, for example, that you had a choice between making the following two gifts to a university; you could write a cheque for $10,000 today, or give $1,000 a year for the next century. The latter donation might seem the more generous one, but at a 10% interest rate, they are worth the same amount. By the time compound discounting had finished with it, that final $1,000 payment would be worth only 7 cents today (see chart).

What does this mean for Eurotunnel`s investors? Extending its franchise by 934 years should increase its value to today`s investors by only 10 Ј15%, after discounting. If they are feeling generous, perhaps the British and French governments should toss in another year and make the franchise an even 1,000.