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I read an article this morning about a million dollar bet Warren Buffett made with a hedge fund that would take 10 years to determine the outcome. They didn't each put down a million dollars, rather, they put down a certain amount of dollars that would accrue to at least 1 million dollars after 10 years. The following is an extract from the article:

Originally, the stake was simply $1 million, an amount that Protege and Buffett guaranteed by each putting up $320,000 in cash that was invested in zero-coupon bonds structured to ascend gradually over the bet's 10 years to a value of $1 million.

My question is how did they get on average a 20% return each year from zero-coupon bonds? It seems too good to be true and I'm just wondering if such opportunities exist for the common investor, both back in 2008 when the bet was made, and today.

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That isn't a 20% return each year, it's a 10% return each year (320000 * 1.10^12 = $1004297) – William Dunne Feb 16 at 16:13
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A link to the article would be a good idea. – Joe Feb 16 at 16:24
    
@WilliamDunne Aren't you factoring in interest? I didn't think zero coupon bonds paid interest – public wireless Feb 16 at 16:27
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@publicwireless They essentially do when they mature. "structured to ascend gradually" sounds like there are multiple bonds with different maturities, thus interest is coming in throughout the 10 years. – Dan Getz Feb 16 at 17:25
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@joe - a quick Google search shows this: fortune.com/2016/02/16/… and this: archive.fortune.com/2008/06/04/news/newsmakers/… – Joe Strazzere Feb 16 at 17:47
up vote 24 down vote accepted

The link to an article about the original bet Joe Strazzere pointed to answers this question quite clearly.

It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet's conclusion.

So, $640,000, not $320,000, in bonds become $1M ten years later, a bit over 4% annual growth. That seems eminently reasonable to me. Each side put up $500k effectively and agreed that the whole $1M will be given to charity.

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Huh, so I read million dollar bet and took it at face value. I guess if you read the fine print it's only a 500K bet then. – public wireless Feb 16 at 20:00
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@publicwireless Well the charity that is chosen wins $1M. – Daniel Feb 16 at 20:25
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Nice! Can I get that 4% with lower capital rate? – Joshua Feb 17 at 2:50

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