Question

"In announcing a Perpetual Time Subscription, the publishers believe their action is without precedent in Publishing history. Life Subscriptions there have been. But the thought of Time ’s being limited to a single lifetime is incongruous. Time is timeless and so, too, is Time ’s Perpetual Subscription. Sixty dollars, payable at the expiration of your present subscription, will bring Time to you during your lifetime – to your heir and his heir – to the end of Time ". June 17, 1929

Assume that a year’s subscription to Time could be purchased for $4 in 1929, that a very safe long-term bond could be purchased to yield 0.07, and that you could borrow very-long-term funds at 0.10.

Assume, long-term bond (costing $60) during the interim years exactly covers the cost of buying the magazines.

Just considering the value of the subscription after 77 years, was it a good buy if you had the cash and the alternative was a long-term investment? You had to borrow the purchase price at a cost of 0.10?

Answer 1

I'll set the context first here. I am borrowing $60 at 10% cost, and using it to purchase a long-term bond yielding 7% in the alternative scenario. The proceeds from investing in the long-term bond exactly cover the cost of purchasing the magazines (I'm not availing the subscription here). So, in effect, my borrowing $60 at 10% cost is helping me finance my purchase of magazines every year.

Given the cost is 10%, I'm effectively paying $6 every year as interest cost. There are two scenarios here: -

1. I borrow $60 at 10% cost and use it for the subscription of Time. I pay $6 per year as interest costs.
2. I borrow $60 at 10% cost, and use it to purchase long-term bonds yielding 7%. The proceeds from investing in the long-term bond exactly cover the cost of purchasing the magazines (I'm not availing the subscription here). I pay $6 per year as interest costs in this case too.

In both scenarios, I am paying $6 per year during the interim years. The choice between subscription and long-term investment doesn't have any difference purely from financial returns point-of-view until year 77. However, there are other risks to be considered: -

1. In scenario 1, I'm guaranteed Time magazines till generations to come. The very long-term fund should still have some finite maturity.
2. In scenario 1, there is a risk that Time doesn't oblige to their commitments, or they roll back their subscription plan anytime. In scenario 2, there is a default risk on the part of borrowers.

Considering the possible risks, I'd say subscription plan'd have been a good buy.