fixed income 6% - what am I missing?

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nungjames
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fixed income 6% - what am I missing?

Post by nungjames »

A non profit I know of are doing some upgrades to their infrastructure.
They are want to borrow 300k over 7 years at 6%. They are guaranteeing the return.

6% seems like a good return for the fixed income part of one's portfolio.

What am I missing here? What questions should I be asking to get a better understanding of this?
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MrBobcat
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Re: fixed income 6% - what am I missing?

Post by MrBobcat »

Why aren't they going to a bank for a loan?
runner540
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Re: fixed income 6% - what am I missing?

Post by runner540 »

You’re missing credit risk.
What’s the collateral?
Why not a bank?
alex_686
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Re: fixed income 6% - what am I missing?

Post by alex_686 »

nungjames wrote: Mon Jun 21, 2021 12:40 pm They are want to borrow 300k over 7 years at 6%. They are guaranteeing the return.
I mean, all bondholders have a guarantee return. But how good is that guarantee? Lots of business, including non-profits, fail.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
HootingSloth
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Re: fixed income 6% - what am I missing?

Post by HootingSloth »

nungjames wrote: Mon Jun 21, 2021 12:40 pm A non profit I know of are doing some upgrades to their infrastructure.
They are want to borrow 300k over 7 years at 6%. They are guaranteeing the return.

6% seems like a good return for the fixed income part of one's portfolio.

What am I missing here? What questions should I be asking to get a better understanding of this?
Presumably they are offering 6% interest to compensate you for credit risk, i.e. the risk that they won't be able to pay you back. As MrBobcat's post suggests, the fact they are borrowing from you, instead of a bank, suggests that a bank would want to get more from them in exchange for that risk. In other words, they probably don't have enough collateral to pledge or a particularly secure stream of revenue to help ensure that you will get your money back. The yield suggests this is akin to what is usually referred to as a "junk bond," i.e. something that could not support an investment-grade credit rating. If you want to help the nonprofit out because you support their mission, and you don't mind taking on the risk of default, you might consider doing this. But you should probably view this as a pretty risky investment, where it is unlikely that you are even being fully compensated for the risk you are taking on, and not as something that is replacing investment-grade bonds in your portfolio.
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nungjames
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Re: fixed income 6% - what am I missing?

Post by nungjames »

Good points all. Keep them coming. Appreciate it
dbr
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Re: fixed income 6% - what am I missing?

Post by dbr »

If you were a member of the board of this organization why would you think this loan is not going to be defaulted. If you don't know, then you should not risk the money.
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Stinky
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Re: fixed income 6% - what am I missing?

Post by Stinky »

nungjames wrote: Mon Jun 21, 2021 12:40 pm What am I missing here? What questions should I be asking to get a better understanding of this?
My view is that you could make a loan in an amount that you would be willing to donate to the charity - maybe $1,000 or so. That way, if the charity defaults, you’ll have made a “contribution”.

I definitely wouldn’t put any more than I would be willing to donate into such an “investment”.
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Taylor Larimore
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Re: fixed income 6% - what am I missing?

Post by Taylor Larimore »

nungjames wrote: Mon Jun 21, 2021 12:40 pm A non profit I know of are doing some upgrades to their infrastructure.
They are want to borrow 300k over 7 years at 6%. They are guaranteeing the return.

6% seems like a good return for the fixed income part of one's portfolio.

What am I missing here? What questions should I be asking to get a better understanding of this?
nungjames:

There is no such thing today as a guaranteed 6% return. Forget about it.

When an investment sounds too good to be true, it usually is.

"More money has been lost by investors seeking higher return than has been lost at the point of a gun."

Best wishes.
Taylor
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AndrewXnn
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Re: fixed income 6% - what am I missing?

Post by AndrewXnn »

Does the non-profit have clear title to the infrastructure (a building I'm guessing)?

Are they renting property from somebody else OR is there already a lien and mortgage on it?

Is the property insured?
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invest4
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Re: fixed income 6% - what am I missing?

Post by invest4 »

The challenges I see with this are the following:

* Inherent risk...you may actually lose what you invest

* How much to invest to make it worthwhile? 50K? 100K? (which may make one pay even more attention to the increased risk)


Overall, I perceive this as a "side-show" investment which is likely not worth your time and effort for the risk and potential return it offers.
DetroitRick
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Re: fixed income 6% - what am I missing?

Post by DetroitRick »

If this is a public offering (and I don't know whether it is), there will be a prospectus. That should contain a thorough outline of all the underlying risks. If there is one, or will be one, that would be the first thing I ask for.

Just speaking generally based on what you described, I would start with 3 potential risks here:
1)Concentration risk. This is one issuance and is likely not an insured bond. So that "guarantee" of 6% is probably based on credit standing (unless it is a secured bond). How does this mesh with your overall fixed income portfolio? Buying 1 bond can be close to "as bad" as buying one stock. You can diversify this away, of course, but the question is whether you want to or are willing to.
2)Liquidity risk. It's only 7 years, and you may have every intention of holding to maturity. But there is some likelihood that there may not be a ready secondary market. Assess whether this is important to you.
3)Credit risk, as others have already pointed out. The 6% suggests it, but certainly doesn't prove it. Worth a bit of digging.

Neither recommending for or against, just some things to consider. Best of luck. Definitely see if there will be a prospectus if the money is material to you.
alex_686
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Re: fixed income 6% - what am I missing?

Post by alex_686 »

DetroitRick wrote: Mon Jun 21, 2021 2:53 pm If this is a public offering (and I don't know whether it is), there will be a prospectus. That should contain a thorough outline of all the underlying risks. If there is one, or will be one, that would be the first thing I ask for.
I doubt it. A prospectus is only required for debt that will be publicly traded. Usually only for large issues. More likely it will just be a plain old loan document. You should still do the leg work.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Topic Author
nungjames
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Re: fixed income 6% - what am I missing?

Post by nungjames »

Great Insight, Thank you all.
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Sandtrap
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Re: fixed income 6% - what am I missing?

Post by Sandtrap »

Eyes open.
Seek legal counsel.

j :D

Does your investment have an exit?
What are the terms?
Who else have they asked?
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Stinky
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Re: fixed income 6% - what am I missing?

Post by Stinky »

nungjames wrote: Mon Jun 21, 2021 4:05 pm Great Insight, Thank you all.
Please let us know what you decide to do.
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edudad
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Re: fixed income 6% - what am I missing?

Post by edudad »

nungjames wrote: Mon Jun 21, 2021 12:40 pm A non profit I know of are doing some upgrades to their infrastructure.
They are want to borrow 300k over 7 years at 6%. They are guaranteeing the return.

6% seems like a good return for the fixed income part of one's portfolio.

What am I missing here? What questions should I be asking to get a better understanding of this?
Might be a noble cause, no doubts.

How are they giving the "guarantee" ?
Will the borrowers have a 1st lien on the infrastructure/property?
123
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Re: fixed income 6% - what am I missing?

Post by 123 »

There are regular middlemen that deal with fixed income investments from non-profits. You know if there is a middleman that there is a good commission or discount involved. One of the main types of "investments" offered by non-profits are "church bonds". There is information on the web about them. A lot of church bonds are sold to wealthy members with both sides likely aware that if the loan fails there likely would not be any foreclosure.
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