Interest Free Finance is it possible

[jjnshell]

Here is proof!

I have inadvertently come across proof of the viability of interest free loans. In fact, one is about to be in operation in Australia and is in a current prospectus which has been registered with ASIC.

Got your attention yet?

Don't get too excited because it ain't something I will be into.

Here is the scoop.

I was reading today a prospectus for a company called "Co Develop Properties Limited" Actually, the version I have is a draft, but I believe the actual one went live on their website today. If you are interested in having an oh, my god chuckle here is the link http://www.codevelopproperties.com.au/

The only catch is the interest free loan is for "Co Develop" and not for you, the trusting investor. (But I'm sure Co Develop really appreciate it anyway)

Anyway, if you choose to, you can subscribe for shares at $1.12 a piece. The company is guaranteeing a return of 10% for the first 12 months, and they really, really, really hope to be able to keep doing that.

The good bit is that the 10% return for the first 12 months consists of a capital return of 12 cents at 1 cent a month. They will take your $1.12 and place 12 cents of it in an unallocated account (i.e. not applied to their business activity) and then give it back to you over the next 12 months. Oh, they get to keep the interest from the funds (all $3.6 million little 12 cent pieces) and will feed it back to you as company earnings to help make up the 10% they really, really, really hope to get.

There you have it, an interest free loan from you to them.

Mighty sporting of you I say.

Maybe D*****x will subscribe for some shares?

Jeff

 

[michaelg]

Hi,

Interest free mortgages? what about mortgages that comply with the muslim faith?

I've read its a growing market in the UK.

If/when the "D" company completes its compliance I would guess that would be a ready market sector and if they test it here they could sell it elsewhere internationally.

Regards
Michael

 

[nat r]

Adamgo1....good post !! the answer is that aussie dollar interest rates are actually quoted in London (for historic reasons) and the A$ Lobor rate is usually with 5bp of the BBSW rate.. ie if the 1mthBBSW today is 5.4067% (which it was) then the A$ Libor would be probably be somewhere between 5.3600% and 5.4500%. Keep in mind Libor quotes a rate for jsut aboutevery currency.

Now the problems is that the article is not clear about whether that is A$ libor or USD libor ir even STG libor (the Journo probably copied it off a press realease and doesn't actaully know) the other point is that Westfield have operation in many countires and if they did borrow in USD then they probably used the funds in their Nth American operations ....therefore no exchange risk. If they bought the funds back into Aust they would have entered into a cross currency swap (they are a shopping centre owner/manager not a currency punting operation). By entering into a xcurrency swap 45 over USD libor becomes roughly BBSW plus 40. The saving mentioned is more due to the depth and size of teh US marekt where more investors with more money delivers slightly tigher pricing....by slightly tighter I mean 10-20bp....not 2 or 3% !!!

Quintets: an institutional investor can get 5.40% buying 30 day notes issued by Comm Bank or Wpac.....there is no way known they would accept 3.65%...otherwise your theroy is correct but it shows that the rates they would need to fund at are not acheiveable. Once again ...the cross currency swap negates 99.9% of the arbitrage if you look to issue in another currency.


A key point to be aware of is that Financial markets are very efficent...any arbitrage that opens up in the markets....be it between currencies or share and bonds etc only lasts for a matter of hours as the weight of hedge fund money piur into it very quickly.

There are billions of dollars at work in hedge fund that continually look to close in on an arbitrage within minutes of it opening up. If somebody does find an arb and then looks to build a lending business based on this arb then the expected life of the business would be measure in days.

One of my ex-collegues runs a hedge fund and he can put $500 mill onto arbitrage within 5 minutes of it appearing.....typiaclly the arbitrage closeses and he unwinds the deal within 48 hours.

I hope this helps.


Natalie

 

[nat r]

Michaelg...Islamic mortgages work by capitalising the interest and making and the 'principal' payments larger to cover the new, higher capitalised balance.

 

[Yonmon]

Quote: "SNIP

If they were able to find borrowers that were happy to buy the bonds at a yield below 5% why wouldn't these borrowers just put thier money directly into the CMT to start with???

Nat R

That's the big question, and the reason why I am sceptical about the commercial viability of IFHLs.

The question was can IFHLs work. To which there are two answers, Mathematically yes, Commercially, almost certainly no, which we agree on.

I think what has ruffled some feathers, mine included is that you seemed earlier to be implying that mathematically it doesn't work, which is patently incorrect. Mathematically it is a doddle to construct a model which returns capital and a yield to the bond buyer, and a profit to the intermediary IFHL lender. Anyone with a piece of paper and a calculator can prove in a few minutes. I have a rough spreadsheet and would be happy to post if someone can tell me how (sorry, am not clued up re techhie stuff).

I agree though re the commercial viability, as I don't see how it makes sense to the bondholder to take a lower yield from an IFHL bond scheme than they could get otherwise for same level of risk/collateralisation. So to that extent I'm with you in the non-believer camp.

On the other hand, as pointed previously, there are lots of pricing anomalies out there in the financial world. If there were no anomalies there would be no derivatives market, arbitrage, hedge funds etc etc. So, however commercially implausible something seems at first sight, doesn't automatically mean it wouldn't work commercially. And that's before we even get onto the whole thorny issue of tax....

So, can we agree that the answer to the thread question is:
Theoretically Yes, in Practice probably not.

Your latest posts seem clearer that your objection is commercial not mathematical, so perhaps we have already got there, which would be great.

 

[Aceyducey]

I'm hesitant to put mine up first as all I will get is flak and comments how somebody's brother's next door neighbour's cleaner knows somebody who knows somebody who said it works ......so therefore my comments are wrong.

I'm worried that when it comes to debating based on ignorance, hersay and gullibility I will be beaten by those that are more experienced than me.

Ahh - Nat - I get you now - you're the reverse Troll!!!

Make lots of aggrsssive comments with no supporting evidence or explanation & then cry 'little me people keep attacking me!!!' when someone asks you to justify yourself.

See Trolls: http://www.somersoft.com/forums/showthread.php?t=17224

Aceyducey

 

[nat r]

Aceyducky...got anything meaning ful to say on international financial markets or cashflows??? If not, how about you let the adults talk.

 

[likewow]

Aceyducky...got anything meaning ful to say on international financial markets or cashflows??? If not, how about you let the adults talk.

hehehe....I have not entered this debate as i dont know a thing about IFHL and
i dont usually comment on things i dont know about plus im not into petty bickering but........Nat...you're a classic.

 

[quintets]

One of my ex-collegues runs a hedge fund and he can put $500 mill onto arbitrage within 5 minutes of it appearing.....typiaclly the arbitrage closeses and he unwinds the deal within 48 hours.
Natalie

Interesting. I don't know how hedge funds work exactly, but I would expect a hedge fund would be constantly looking for various types (?? ) arbitrage opportunities constantly. I can appreciate how rare they are and the limited lifespan. But given a mathematical model of how often they appear, which is university level statistics, any hedge fund manager should be able to predict how many such opportunities exist in a year and the profit one could make from it. The next thing is finding people quick enough and detailed enough to spot them as they fly by and jump on the opportunity.

From your comments, Nat_R, you seem to be saying that the profit would not be enough to pay for salaries (typically Ph.Ds), computers and other running costs and depending on how much startup capital one had, it would still be a slow bleed to oblivion.

So, can we agree that the answer to the thread question is:
Theoretically Yes, in Practice probably not.

I suspect even theoretically, it might be a stretch since it depends ultimately on the market for bonds at the assumed rate and the profit one can make on it.

But in practice, I agree it seems possible to make some money on arbitrage, but the question is whether you can make enough money. It seems for the present, the answer is no.

Jireh

Jireh

 

[nat r]

quintets: most hedge funds are multi strategy so whilst they look for arb opportunities they also take directional, duration and cross currency risk to achieve their returns.

Re commcially viable v's mathematically viable....IMHO if the maths doesn't work using real prices then mathematically the model fails.

Think about this: a perpetual motion machine fails due to energy loss from the system because of the presence of friction etc. If you reach the conclusion that they are possible if you can get the energy loss to zero then what have you really proven???

 

[kissfan]

Think about this: a perpetual motion machine fails due to energy loss from the system because of the presence of friction etc. If you reach the conclusion that they are possible if you can get the energy loss to zero then what have you really proven???

Huh???

 

[duncan_m]

Huh???

What Nat is saying is that you still havent got the Perpetual Motion Machine working, you reached a conclusion that it WOULD work if you could get rid of friction. Now you have to get rid of the friction.

Keep up the great work Nat, love your input

 

[nat r]

Duncan: have you read "The Crying of Lot 49" by Thomas Pynchon???..he is one of my fav writers and his take on Perpetual Motion machines is just too funny.

 

[duncan_m]

Duncan: have you read "The Crying of Lot 49" by Thomas Pynchon???..he is one of my fav writers and his take on Perpetual Motion machines is just too funny.

No. But I'm going to Borders tonight, I'll see if its available, sounds like a great read!

 

[Monopoly]

"The Crying of Lot 49" by Thomas Pynchon

Thanks for the reminder Nat, I personally haven't read the book, although I have had colleagues who have done, and they raved about it.

There are so many definitions, books, references to Perpetual Motion Machines, but one I particularly like for it's simplicity (which my daughter used in her school project some years back) is the following:

There are three laws of thermodynamics: you can't get something for nothing, you can't win, and you have to lose. The first law says you can't produce matter or energy from nothing; they are conserved. The second says the amount of entropy in the universe can only increase. The third notes that friction exists, so entropy does increase.

Perpetual motion machines are machines that are supposed to disobey one of the laws of thermodynamics. Usually it's the second law that people want to break, reversing the flow of entropy. Entropy is the amount of disorder in the universe.

http://burtleburtle.net/bob/physics/whythere.html

Cheers,

Jo

 

[Aceyducey]

Aceyducky...got anything meaning ful to say on international financial markets or cashflows??? If not, how about you let the adults talk.

Classic Trolling

Nice take on the Nic Nat, no-one's ever come up with that one before.

When you say something of substance I'll make my comments on international financial markets. I'm uninterested in shadow boxing with you.

And my comments on interest-free finance have been very clear. Let's wait until there's enough information to form an educated opinion. And let the regulators do their jobs. Then we'll know what is & isn't legal (as opposed to possible) in our legislation.

BTW Nat - have you actually got ANY investments?

Cheers,

Aceyducey

 

[nat r]

Ac-ey-dc: other than trolls do you have anything to talk about??

BTW I have many investments ...none of them are used to fund zero interest mortages. I acually have a whack of cash in local & offshore hedge funds, some in private equity in unlisted companies and a fair amount in normal equites (geared and ungeared).

 

[kissfan]

Ac-ey-dc: other than trolls do you have anything to talk about??

BTW I have many investments ...none of them are used to fund zero interest mortages. I acually have a whack of cash in local & offshore hedge funds, some in private equity in unlisted companies and a fair amount in normal equites (geared and ungeared).

Any tips for us

 

[Yonmon]

*sigh* well I did try

I guess appealing to logic and the normal usage of words was a bit simplistic huh?

 

[quintets]

quintets: most hedge funds are multi strategy so whilst they look for arb opportunities they also take directional, duration and cross currency risk to achieve their returns.

Re commcially viable v's mathematically viable....IMHO if the maths doesn't work using real prices then mathematically the model fails.

Think about this: a perpetual motion machine fails due to energy loss from the system because of the presence of friction etc. If you reach the conclusion that they are possible if you can get the energy loss to zero then what have you really proven???

Nat_R: If I used sophisticated hedge fund strategies around arb opportunities to achieve returns over a given time period, then how much money can I make? Let's say the target profit is $500,000 dollars per month for a given amount of capital. How much capital would I need to clear $500,000 a month using these strategies? How does that work?

I don't think the point of an IFHL is to create the perpetual motion machine. At best it only appears to be a perpetual motion machine to the home loan borrowers. But secretly inside, there's a little self-sustaining "hedge motor" that needs $500,000/mo to keep it going.

Books: thomas pynchon, eh? Okay, we'll have to look this one up.

Jireh