[pg314]

> If those assets are in your hold to maturity portfolio, they are still worth $100m.

They are still worth $100m at maturity. $100m in ten years is (usually) worth less than $100m now. Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth.

To correctly value them now you need to calculate the NPV.

[s1artibartfast]

In real terms, you will get back exactly a hundred million. In the npv at that date will be exactly 100 million.

$1 after inflation is still $1. It is just that the value of $1 is now different.

As long as you hold to maturity, the number of dollars does not change.

If you report your Holdings in terms of dollars, they are always accurate as long as you hold.

If someone tells you they have $100 maturing in 10 years, it is Trivial for you to do the npv calculation yourself with your speculative model of what inflation will look like over the next 10 years.

[pg314]

> In real terms, you will get back exactly a hundred million.

In nominal terms. In real terms you have to adjust for inflation. [1] is a starting point if you want to read more.

> As long as you hold to maturity, the number of dollars does not change.

A dollar now is not the same as a dollar 10 years from now. [2]

[1] https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco... [2] https://en.wikipedia.org/wiki/Time_preference

[s1artibartfast]

I think we are misaligned on the reference time for the real valuation.

If you buy a 10 year bond today, you will get $100m dollars in 2023.

In 2033, that $100m will have a real value of $100m 2033 dollars on your balance sheet.

HTM assets are reported in the nominal purchase price today, which is also the real dollar value if you calculated it on the day of maturity.

I agree that if you estimated the net present value of $100m 2033 dollars, it would be worth less in terms of 2023 dollars.

This brings us back to your earlier question

>Do you really want to pretend that a ten year bond you purchased when inflation and the interest rate were near zero, is worth the same when inflation and the interest rate go up to say 10%? What about inflation of 100%? In nominal terms you’ll get back your capital, but in real terms you will get back only one thousandth.

YES! This way the asset sheet is always correct in how much you will get for the asset. If you have a $100 nominal bond it is worth $100 dollars. That is true today, and that will be true on the day of maturity. It will be true every day in between. The dollar value of the asset remains constant at the time of reporting.

Why would you want to report the net present value of that asset at maturation - which sounds like what you are suggesting?

The point of listing your bonds on your balance sheet isn't to estimate profit or returns, it is to list your current asset allocation.

You have a separate line item for revenue coming from those bonds. You have a separate model entirely for calculating ROI and profitability.

If you made a spreadsheet of your current asset allocation today, how would you list money locked in a 10 yr CD. As the dollar amount in the account, the value if you were forced to pull it out and pay a penalty, or some time shifted valuation?

[chordalkeyboard]

> In real terms, you will get back exactly a hundred million. In the npv at that date will be exactly 100 million.

you wrote 'real terms' when you meant 'nominal terms.'

> $1 after inflation is still $1. It is just that the value of $1 is now different.

That is why we distinguish between 'real value' and 'nominal value.'

[s1artibartfast]

>> $1 after inflation is still $1. It is just that the value of $1 is now different.

>That is why we distinguish between 'real value' and 'nominal value.'

What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1

[chordalkeyboard]

> What will the real value of a $1 bond be on your balance sheet the day it matures? exactly $1

The real value in future-date dollars will be $1. In present-day dollars it is likely to be less, the ability to refer to which distinction is the purpose of the formal difference between nominal and real value.

[s1artibartfast]

I agree. The difference between the two converges to zero as your your comparison time frames go to zero.

Initial time for real dollar caluculation can be anything. You can ask what your real dollar salary is relative to 1950, or relative to 1951, or yesterday.

You can ask what was the real dollar salary in 1951 relative to 1950, or 2051 compared to 2050.

While I meant to write real dollars, I wish I wrote nominal, based on how much confusion it caused.

I still stand by the idea that it is silly, and not very useful to put a future return on investment on an asset list in to 2023 dollars using a 10 year inflation projection.

Then the reported asset would fluctuate based on your model, and you already know exactly where it will end on the maturation date.

[chordalkeyboard]

> Initial time for real dollar caluculation can be anything. You can ask what your real dollar salary is relative to 1950, or relative to 1951, or yesterday.

Regardless of which day's dollars we use as a baseline for comparison, a bond issued under at a lower interest rate is discounted relative to the same bond issued later at a higher interest rate. Quibbling about how we express this valuation suggests you don't understand this difference, but this difference is important to understanding the current day banking crisis.

> While I meant to write real dollars, I wish I wrote nominal, based on how much confusion it caused.

You still seem unaware that these meanings and words are a very well understood convention that you violated. The only confusion was the confusion you had in the meanings you assigned to the words.

> I still stand by the idea that it is silly, and not very useful to put a future return on investment on an asset list in to 2023 dollars using a 10 year inflation projection.

The main thing is that these valuation rules exist for reasons and while we could debate which rules are good etc., understanding the basics of bond valuation and the common terminology we use to discuss them is a minimum prerequisite and I'm still working on getting you on board with the basic terminology every one else is using.

There isn't much discussion to be had without a common vocabulary.

[jameshart]

You can’t calculate NPV. You can only estimate it.

You can value something at its current market value, if the asset is one that has such a thing. And fair market value will generally correspond to what you would estimate to be net present value, plus whatever risk premiums and holding costs and so on that the market is accounting for.

[pg314]

> You can’t calculate NPV. You can only estimate it.

According to Merrian-Webster [1]:

calculate: 1 b: to reckon by exercise of practical judgment : ESTIMATE

[1] https://www.merriam-webster.com/dictionary/calculate

[jameshart]

Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you.

But sure, let me clarify it to: you can’t calculate a precise NPV.

You can only estimate one.

Which, when we are trying to do things like ‘calculate the total assets a bank has’, makes the net present value of their assets a not very reliable number to use.

[pg314]

> Okay, weird bit of pedantry - pretty sure that if a math test asks you to ‘calculate the product of 127 and 954’ you wouldn’t get many marks for answering ‘about 100,000’, but feel free to staple a copy of the dictionary definition to your exam paper and see if that works for you.

I wasn't taking a math test. I was saying something about NPV using a common meaning of an English word. You chose to ascribe a different meaning to that word, and pedantically - and incorrectly - tried to correct me.