US Treasury Bond Investing

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I have a guy that wants to create a promissary note backed by US Treasury Bonds instead of real estate - basically he wants to do a simo close and assign the payments to the investor....i am leaving out some small details but doesn anyone know if this sounds like a doable deal?

Comments(3)

  • InActive_Account28th September, 2004

    If you do it make sure that you know the value of the bonds. Some folks pull a scam using face value of the bonds. When in fact they buy them for a lot less than that.

  • Mantis3rd October, 2004

    Lacashman offered excellent advice. The type of bond is important, for instance zero coupon bonds don't make regular interest payments (no coupon), therefore they trade at discount of their face value. A treasury zero maturing 30 years from now might have a face (value at maturity) of $1000 but be trading in the open market for approximately $40 now. A bond that matures next year and has a coupon (interest) payment of 6% may actually be worth more than the face value right now. You need qualified advice on the exact bond being offered.

    Also, who will hold the bonds (trustee?) to ensure that the person does not sell them after pledging them as security to you? What are the terms under which they will be held?

    I would consider this situation but I would ask for a fair return (probably only 6% to 9% as gov't bonds are generally very liquid and safe) and would have experts (bond advisor, attorney, trustee, etc.) involved to ensure the safety of the transaction/pledge because if they default you will need to be able to force sale of the bonds and the distribution of the funds to recover your money.

    Also, they should pay the trustee fee's.

  • active_re_investor11th October, 2004

    The transaction could work but...

    Picking up where the others have left off...

    1. Make sure the bonds are real and not forged.
    2. Are the bonds protection for the principle only? At what point in the life of the bonds should they cover the principle owed. Zeros can be used but you need to understand the structure and maturity.
    3. If there are zeros involved then watch out for phantom income. This is where you have to pay taxes on income you have not received yet (zeros do not pay current income).

    I have worked up the numbers for some similar deals. It is pretty rare that the numbers work any better then just a loan against the property.

    John
    [addsig]

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