Moody's Rates Bowdoin 4.69% Century Bonds Aa2

Includes: TLT
by: Charles Margolis

In July of 2012 Bowdoin College issued 100 year bonds (CUSIP: 102291AA9) with a historically low interest rate coupon of 4.69%. The college is rated Aa2 by Moody's, and is a non-profit 501c3 educational institution with around $1B endowment.

Bowdoin College has about 1,775 students and around a 20% acceptance rate. I spoke with the office of Bowdoin's president and they requested Barclay's send me a prospectus for Bowdoin College century bonds due July 2112. The prospectus arrived the next day, via over night mail.

To put Bowdoin's century bonds into perspective we need only look to last year's MIT 2111 century bonds, with a 5.6% coupon. MIT is rated AAA and currently their century bonds yield around 3.7% and are priced in the mid $1,400 range per bond. The MIT 2111 bonds ultimately make more than the Bowdoin bonds, additionally the MIT 2096 bonds make more than the MIT 2111. However the Bowdoin bonds are currently far less expensive.

Here is an example chart of the income these bonds should produce over the long term. I favor the MIT 2096 bonds over their 2111 bonds, however when rates go up the price of these bonds will drop. So rather than jumping in, keep a note about them for the future when they may be more affordable.

Cost Annual Income Total Income Minus Premium (years)
MIT 2096 7.25% [AAA] $1,720 $72.50 per bond 6,017 - 720 = 5,297 (84yrs)
MIT 2111 5.6% [AAA] $1,470 $56 per bond 5488 - 470 = 5,018 (99yrs)
Bowdoin 2112 4.69% [Aa2] $1,050 $46.93 per bond 4,690 - 50 = 4,690 (100yrs)

Please note that the Bowdoin bond's are currently offered for $1,050 - $1,070. However when they settle they appear to have a lower market price. The settled bonds currently have a market price of $940 an automatic drop of $100 per bond.

Century bonds are novel and should be very carefully considered just like any investment. Century bonds unlike many fixed income CEFs or mutual funds chart out a specific structure for the very long term. A few quality positions, in total should not exceed 4 or 5% of an overall portfolio. Keep in mind when rates go up there may be better opportunities for higher coupon long term bonds.

As An Eagle Towards The Sky

In 1794 the Massachusetts General Court chartered Bowdoin College, named for the former governor of the state. The Bowdoin family simultaneously donated 6,000 acres of their family property in Brunswick, Maine and $5,500 for the school. The school sold part of the land in 1802 to sustain operations.

James Bowdoin II (1726-1790)

  • 1770 co authored A Short Narrative of the Horrid Massacre in Boston, after British soldiers fired into a crowd and killed 5 civilians.
  • He was president of the executive council of the Massachusetts Provincial Council until 1777.
  • Bowdoin ran against John Hancock to be governor of Massachusetts in 1780 however lost the election.
  • James Bowdoin ultimately was elected governor in 1785.
  • Their rivalry was so great that the Massachusetts General Court waited until after John Hancock died to create a College named for James Bowdoin II.
James Bowdoin II

At this time Bowdoin is offering $128 M in new bonds with a 4.69% coupon that are supposed to provide fixed income for 100 years. Though the prospectus details that the college has the ability to make optional offerings to buy back the bonds; the bonds are listed as non callable.

The bonds are subject to optional redemption prior to maturity at the written direction of the Institution to the Trustee at least 45 days before the redemption date (in Authorized Denominations) on any Business Day at the Make-Whole Redemption Price. (pg 3 Bowdoin Prospectus)

Bowdoin's motto is An Eagle Rises Towards the Sky. Here the college located in Brunswick, Maine is depicted in 1821.

The prospectus reveals that Bowdoin has $139 M outstanding debt, in the form of bonds that are due in the mid to late 2030s. There are $98 M in 5% coupon bonds and about $20 M in 6.67% coupon bonds, in addition to $20 M in variable rate coupon bonds all due between 2032-2039.

According to the prospectus, interest payments will amount to $6,030,505 each year until 2112. Of Bowdoin's 1,775 students 40% receive financial aid; however Bowdoin is one of the few colleges in the nation to eliminate student loans provided by the school, in favor of grants. The tuition to attend Bowdoin is currently $43,676.

"The vast majority of our students go on to pursue graduate or professional study after Bowdoin," said Mills. "Some see a calling in such vital but often low paying fields as teaching or social work. With significant debt at graduation, some students will undoubtedly be forced to make career or education choices not on the basis of their talents, interests, and promise in a particular field, but rather on their capacity to repay student loans. As an institution devoted to the common good, Bowdoin must consider the fairness of such a result." - Barry Mills (Bowdoin College President)

The Buck Center for Health & Fitness at Bowdoin College made possible by a $10M gift from alumni and Subway restaurant co-founder Peter Buck (52').

Century Bond Analysis

Currently Bowdoin's century bonds yield about 4.4% and are priced between $1,050 and $1,065 per bond in minimum quantities of ten bonds. Please note that when interest rates rise and the price of the Bowdoin bonds go down they would yield 6.7% when they are $700 per bond, and 7.2% when they are $650 per bond. However by this time the Bowdoin bonds should be on their way to generating income that ultimately eclipses the difference.

To gauge the current interest rate phenomenon take a look at the ten year chart on iShares Barclay 20+ yr. Treasury Bond ETF TLT:

tlt 10 yr. graph

The price of the bonds have soared as the yields have diminished. Currently 20 year US Treasuries are priced higher than at the peak of the economic down turn in 2008 and 2009.

So many bond investors are looking to the future when rates and yields should be greater. I believe a good consideration is to invest and save for higher yield bonds issued between 2018 and 2022. For instance consider George Washington University 2022 3.485% coupon bonds (CUSIP: 372546AQ4) and perhaps Bowdoin College century bond income to generate funds for further investment in 5-10 years.

Additionally since yields are so low, keep a list of securities that you would like to follow. If they are currently too expensive or do not yield enough for your objective, keep them in mind for the future when rates are expected to go up.

Financial Institutions & Charities May Consider Century Bonds

An individual century bond should not exceed approximately 1% of an entire portfolio. Though some individual investors as a novelty could consider giving a couple to their grandchildren. Furthermore consider investing in an IRA so the income is not immediately taxed; though of course IRA distributions are ultimately taxed.

Larger and long term institutions may wish to follow and consider investments in the Bowdoin College century bonds. This is an example of allocations to consider:

Portfolio Size

Bowdoin College 4.69% 2112

price: $1,065

GWU 2022 3.48%

price: $1071

Total Percentage
50,000 0 : $0 1 : $1,071 $1,071 2.1%
100,000 1 : $1,065 3 : $3,213 $4,278 4.2%
500,000 2 : $2,130 5 : $5,355 $7,485 1.5%
1,500,000 5 : $5,325 10 : $10,710 $16,035 1%
3,000,000 10 : $10,650 15 : $16,065 $26,715 0.9%
5,000,000 20 : $21,300 25 : $26,775 $48,075 0.9%
10,000,000 25 : $26,625 35 : $37,485 $64,110 0.6%
25,000,000 30 : $31,950 50 : $53,550 $85,500 0.3%
100,000,000 35 : $37,275 75 : $80,325 $117,600 0.1%
300,000,000 100 : $106,500 100 : $107,100 $213,600 0.07%
1,000,000,000 100 : $106,500 100 : $107,100 $213,600 0.02%

Currently I have only seen minimum quantities of ten Bowdoin century bonds. However the prospectus states that they are tradeable in increments of $1,000 face value. Ten of the Bowdoin bond's should generate $469 per year, and pay $234 semi annually on January 1st and July 1st.

It is important to consider your unique income situation. If you are retired and are drawing from your $100,000 IRA this investment may not be adequate. However if you are still depositing annually and do not intend to draw from the IRA for 15 years, then the position may work for your objective.

As the bond holder you have the ability to offer to sell long term bonds before their maturity. However I strongly recommend only investing amounts that you are content with leaving for the full duration of a bond.

In Bowdoin College president's article Deal of the Century Barry Mills writes:

Of course, none of us reading this today will be around in 2112 when our "century bond" comes due ...

However, it is possible some of the people you read this to will be. The financial institutions and charities that work to exist for as long as possible should also be around in July of 2112.

If you have any comments or additional considerations on the Bowdoin College century bonds or another security you might pose for this strategy, please comment below.

Disclosure: I am long MCO. I am long 2112 BOWDOIN COLLEGE TAXABLE BD SER 2012 4.693% and 2022 GEORGE WASH UNIV TAXABLE BD SER 2012 3.485%