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Bloopers & Blunders: Yield on IBM's 100-Year Bonds

Quotation

In analyzing IBM’s motivation for issuing 100-year bonds, consider the following quotation:

"International Business Machines yesterday launched $850m in 100-year bonds, the largest "century bond" issue ever. The issue is the latest in a spate of century bonds in the US as companies rush to take advantage of investors' appetite for higher-yield investments." (Financial Times, December 5, 1996)

Answer

If the true reason were "investors’ appetite for higher-yield investments," IBM would not be able to suppress investors’ appetites as the bond is considered a quality bond with a rating of A. Also from the information in the main story above, the market yield on these bonds is only .8 percent higher than a 30-year U.S. Treasury. Such a spread from Treasury can hardly be considered to suppress investors’ appetite for risk. As noted earlier, the main motivation for such a bond is that it effectively locks in a low interest rate for a long-time, i.e. provides a source of low cost financing.

If the Times’ argument were true, then we should see more companies whose bonds are rated as "junk bonds" issuing new debt. To my knowledge there is not such evidence.