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Strategies & Market Trends : Dividend investing for retirement
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To: Elroy who wrote (6992)12/30/2010 6:34:02 AM
From: Elroy  Read Replies (1) of 34328
 
I think I've figured out the risk. Lets say they have a million capital from a secondary. They then borrow 8 million from their bank at 0.3% and have to repay that amount in one month. They buy two year debt which yields 1.7%. A month later when their loan is due they sell the 23 month debt and pay off their 8 million loan. They make 1.7%-0.3% x 8, on an annual basis. Then they repeat the process.

If short term rates rise dramatically between the time they bought their 2 year debt and when they try to sell their 23 month debt, they're going to get less face value on their two year debt than they paid (rates rise, debt face value falls), but they owe exactly the face value of the one month obligation since it is at maturity. That's a very simple explanation of what they're doing, but I guess that's the risk. How can they get around that risk?
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