Interest Free Finance is it possible

[XBenX]

It really doesn't matter what discount rate you use, the more important factor is that the yield on the CMT will be lower than the cost of funds from the bond holders and the yield on the funds advanced to the borrowers is zero....all up the assets yield less than the liabilities.

Natr - think you have misunderstood my previous posts.

I used the example of a PI using annuitiies (an income stream) to fund further borrowing - my point was that this would be successful if the return on investment is greater than the cost of fund...

If a PI can follow this strategy successfully why can it be applied on a larger scale?

Of course what you say is true - but where are you getting the information regarding the companies costs of funds, returns etc?

That is what all of my posts have been asking - Im attempting to understand the assumptions you are making...

 

[nat r]

re: cost of funds...I deal in this stuff everyday so I took what the market normally charges for mortgage backed bonds etc etc and applied those numbers.

If anything, the flaw in my thinking is that I used numbers that apply to business models that are tried, tested and actually work and from issuers that have actually been funding real mortgages with real bonds for many years.

Where I used to work we had 3 Maths Phd cone heads working all day on this stuff and the best they could ever do was come up with structures that would save 1 or 2 bp here or there. Worldwide there are literally 1000's of highly skilled people working to push the boundaries of what can be done in the wholesale markets and some of the deals that I have seen or worked on are amazing.

However, there are a few set rules when it comes to cashflows (think laws of physics) that no amount of brains can overcome.

 

[Smitty]

Herein lies the problem...the assets yield less than the liabilities.

Derivex, from my understanding, is a bond issuer. i.e. investors pay capital (cash) to buy bonds Derivex offers, i.e. fund raising. Derivex raises 2.2 times the funds they need to fund a given loan. The example given by Derivex is that for a loan of $500K Derivex raise $1.6M, of which $500K goes to the borrower for an interest free loan, but the rest ($1.1M) is used by Derivex for it's own investment purposes. Here in lies your problem solved. If Derivex is clever (which I'm sure they are), all they need to do is keep all costs fixed (i.e. interest paid is in arrears on all borrowings) and calculate the returns on compound interest investments to be sure they come out in front. Bond buyers like to know that their money is invested across a diverse portfolio, including residential property in Australia (even if this part of the investment isn't earning a profit, just delivering reliable cash flow), just so long as the overall portfolio is performing.

I have a loan application approved with them, and look forward to paying my loan off quicker and with lower repayments. I don't really care that I don't truly understand how they do it. Even if they could explain it to me, why should they, it's their intellectual property (like asking KFC for the secret recipe). The loan contract and mortgage documents (legal documents) are what protects me the borrower. If worse comes to worse, and Derivex goes under and my loan is called, I'll just refinance back to another lender, big deal. What I like is that I have their money, and they are waiting for me to pay it back, which is much better than the other way around.

 

[Yonmon]

I did a back of envelope calculation today and proved to myself that the D*****x model or something similar would "work" theoretically.
My model indicated that to repay the capital sum received from bondholders from the two-thirds set-aside would require a return on investment of about 1.17% p.a. for 25 years.
The mortgage repayments if passed onto bondholders would equate to a yield in the meantime of about 1.13%.

There would then be enough "profit" per annum in the difference between investment returns on the two-thirds and the 1.17% needed for the end bond repayment, to allow the scheme provider to at least partially hedge against forex/IR moves and still give them a profit.

I ignored "conduit fees".

The question remains, why would the bondholder accept 1.13% return on capital? So, it seems to fall down in practice.

However, that argument would also suggest that it's impossible for Japanese interest rates to be a tenth or less of UK/US/Eurozone rates, yet they continue to be so.

So, the conclusion I've come to is that interest-free home loans may be unviable in practice. But if so, so is the international financial system as a whole...

 

[Aceyducey]

Well, our international finance system is built on conjectures, hopes & dreams - backed up with words of honour.

But everyone has so much invested in the system that no-one can let it fall over

Cheers,

Aceyducey

 

[littlejen]

for monopoly

I have seen the office- its on the top floor of a building at King St Wharf overlooking Darling Harbour. It had real furniture and real people working there. Downstairs next to the lift there is a list of the company names that occupy the all the suites in the building. D****** is listed there.

Unless of course I was dreaming...........................?

If it does work out- great! If not- well ... back to our day jobs

 

[keithj]

Asset protection of 100% LVR loan

Another benefit of 100% (or 95%) LVR loans is asset protection.

For maximum onging protection, an IP would need to be refinanced back to full value every year as equity builds up by both the increase in value and as principle is paid down.

 

[Monopoly]

For Jenni Macks

I have seen the office- its on the top floor of a building at King St Wharf overlooking Darling Harbour. It had real furniture and real people working there. Downstairs next to the lift there is a list of the company names that occupy the all the suites in the building. D****** is listed there.

Unless of course I was dreaming...........................?

If it does work out- great! If not- well ... back to our day jobs

Thanks for the update littlejen,

Did Simon give you a guided tour of his new office??? That's great!!! Hope he was smart enough to secure a desk with a window view to the harbour; I couldn't think of anything more relaxing.

Cheers,

Jo

 

[likewow]

I have seen the office- its on the top floor of a building at King St Wharf overlooking Darling Harbour.

Wow!! That must be costing them a bomb! Im always a bit apprehensive about companies with super flash offices and /or positions. That generally applies to public companies and investing in them but regardless it gives a good insight into the execs mindset and the corporate culture they instil in the company.

Its prudent to remember the cost of running the business must be added to the cost of the money for that much discussed on this forum company.

 

[Wazza007]

Wow!! That must be costing them a bomb! Im always a bit apprehensive about companies with super flash offices and /or positions. That generally applies to public companies and investing in them but regardless it gives a good insight into the execs mindset and the corporate culture they instil in the company.

Its prudent to remember the cost of running the business must be added to the cost of the money for that much discussed on this forum company.

I generally would agree with you Likewow, the other thing that rings alarm bells for me is if they have a huge aquarium at reception(2 startup companies I had dealings with that went broke after 6 months)

The office is far from superflash its in a nice location but very "working office" like and Trevor sits in the same space as everyone else.(no seperate office)This told me something about the exec mindset and corporate culture when I visited.

 

[investor]

Trevor sits in the same space as everyone else.(no seperate office)This told me something about the exec mindset and corporate culture when I visited.

I can guarantee you that if they get started, within a few weeks Trevor will have his own office fronting the harbour.

Regards

Investor

 

[nat r]

" Derivex, from my understanding, is a bond issuer. i.e. investors pay capital (cash) to buy bonds Derivex offers, i.e. fund raising. Derivex raises 2.2 times the funds they need to fund a given loan. The example given by Derivex is that for a loan of $500K Derivex raise $1.6M, of which $500K goes to the borrower for an interest free loan, but the rest ($1.1M) is used by Derivex for it's own investment purposes. Here in lies your problem solved. If Derivex is clever (which I'm sure they are), all they need to do is keep all costs fixed (i.e. interest paid is in arrears on all borrowings) and calculate the returns on compound interest investments to be sure they come out in front. Bond buyers like to know that their money is invested across a diverse portfolio, including residential property in Australia (even if this part of the investment isn't earning a profit, just delivering reliable cash flow), just so long as the overall portfolio is performing."

Smitty is this tongue in cheek or do actullay think your explanation works??

If your answer is the latter I suggest you do some home study on Present Value, Future Value and the bond market.


BTW I have worked in the wholesale bond market for 16 years.

 

[Hulkster]

The office is far from superflash its in a nice location but very "working office" like and Trevor sits in the same space as everyone else.(no seperate office)This told me something about the exec mindset and corporate culture when I visited.

Did you know Telstra operates on the same system - usually no offices? Any opinions on their culture?

 

[always_learning]

This thread was supposed to be a company name free thread in particular the D****** company. As for discussion about seating location and comfort levels executive employee's, why dont we open another thread about Trevor's future office conditions, we can discuss if a high backed executive chair in red leather embroided with the letter "D" would add prestige to the future executive suite.

 

[XBenX]

NatR - you have continued to talk down to the forum with little or no explaination and plenty of vague responses (much like D)...

I too work in the industry (for a few more weeks at least) so Ive got a *little* bit of experience in financial mathematics.

From my other posts you'll probably also notice Im a jaded academic...verging on a professional student :/

I however, do not have a closed mind...

You have continued to ignore my questions and offered nothing of value.

If I was a betting man Id offer some pretty good odds on D not working out - I dont let that cloud my thinking, D is still possible...

I can offer nothing further in this discussion.

 

[Yonmon]

Entirely agree XBenX. I am also sceptical about D*****, but for nat effectively to say, it won't work, trust me I'm a bond expert doesn't hack it with me I'm afraid.
As I posted before, it's evident that something like the D***** model works mathematically in a banal sense. Whether it works commercially remains to be seen. Again I don't see how, but then neither do I see how Japanese savers can have accepted near zero IRs for years.

 

[always_learning]

Most Japanese think that "Investment is risky", but that is exactly the same thinking as most Australians! So what is the difference? Japanese in particular the older generate SAVE MONEY! Most Australians spend it!

Nope, if Japanese wanted to "invest" Australia they simply take out a Australian $ account with one of the major banks and get 4%.

 

[kissfan]

NatR - you have continued to talk down to the forum with little or no explaination and plenty of vague responses (much like D)...

I too work in the industry (for a few more weeks at least) so Ive got a *little* bit of experience in financial mathematics.

From my other posts you'll probably also notice Im a jaded academic...verging on a professional student :/

I however, do not have a closed mind...

You have continued to ignore my questions and offered nothing of value.

If I was a betting man Id offer some pretty good odds on D not working out - I dont let that cloud my thinking, D is still possible...

I can offer nothing further in this discussion.

Hi guys.

Apologies to A.L for the continued digression of this thread.

For those of you that know the financial jargon i.e XBenX and NatR etc, do you think that ASIC and anyone else investigating D****** will have the nous to pick up on things that you guys are suggesting, i.e do they have the authourity to "shut it down" if they think things don't stack up.

N.B I am not anti D, in fact I hope it does fly, just not fluent enough in the financial language that you guys talk in.

Regards
Marty

 

[Sunfish]

Most Japanese think that "Investment is risky", but that is exactly the same thinking as most Australians! So what is the difference, Japanese in particular the older generate SAVE MONEY! Most Australians spend it!

Nope, if Japanese wanted to "invest" Australia they simply take out a Australian $ account with one of the major banks and get 4%.

Japanese have every right to believe investment is risky. Investors in both real estate and the stock market copped a battering in the early ninetys, so much so that their banks are still reeling under the weight of non-performing loans.

It does not matter either that they "could" invest directly in the Oz$, they don't seem to be doing so. At the moment the Japanese are still buying US gov paper, but they, like the rest of the world, are aware that they have suffered 50% paper loss vis a vis the Euro so they should be looking for better performing investments.

It's hard to get accurate figures but it seems some central banks are buying gold again. Argentina (Brazil?) has definately bought gold to shore up it's currency and Japan and China may be buying as well and we all know gold pays zero% interest.

Personally I doubt Japan, and definately not their central bank, would be the source of funds for a principle only loan though.

I can't go past the US where much of the privately owned wealth resides and is the currency at greatest risk of depreciation. They can't all buy gold! because there is just not much gold around, and even less silver. The early adapters are doing so but the millions of millionaires need to find a "safe haven" for their riches but most would know nothing about o/s markets so income bonds could look attractive. Devaluation of their domestic currency is likely to give a better real return (re-converted to USD) than US long bonds paying 4.5% in a debasing currency. These folks would see no reason to hedge because that is exactly what they are hoping for.

All this sounds plausable to me. I will not comment on probabilities tho.

Thommo

 

[Sunfish]

Japanese have every right to believe investment is risky. Investors in both real estate and the stock market copped a battering in the early ninetys, so much so that their banks are still reeling under the weight of non-performing loans.

It does not matter either that they "could" invest directly in the Oz$, they don't seem to be doing so. At the moment the Japanese are still buying US gov paper, but they, like the rest of the world, are aware that they have suffered 50% paper loss vis a vis the Euro so they should be looking for better performing investments.

It's hard to get accurate figures but it seems some central banks are buying gold again. Argentina (Brazil?) has definately bought gold to shore up it's currency and Japan and China may be buying as well and we all know gold pays zero% interest.

Personally I doubt Japan, and definately not their central bank, would be the source of funds for a principle only loan though.

I can't go past the US where much of the privately owned wealth resides and is the currency at greatest risk of depreciation. They can't all buy gold! because there is just not much gold around, and even less silver. The early adapters are doing so but the millions of millionaires need to find a "safe haven" for their riches but most would know nothing about o/s markets so income bonds could look attractive. Devaluation of their domestic currency is likely to give a better real return (re-converted to USD) than US long bonds paying 4.5% in a debasing currency. These folks would see no reason to hedge because that is exactly what they are hoping for.

All this sounds plausable to me. I will not comment on probabilities tho.

Thommo

Nat, Please tell me which point(s) in this post are irrelevant or in error.

If you can't do so, maybe you should take the advice of Acey and Peter (I think) and take your overbearing manner elsewhere.

Respectfully yours, Bill