If I run an investment business and I own lets say ($10,000) in Bonds, can I obtain a loan from a Bank for $10,000 with the bonds as collateral? Thus allowing me to continue to hold $10,000 in Bonds while at the same time getting $10,000 in cash to buy another rack of Bonds?
It’s possible that a bank would loan you money in this scenario. The conundrum is that the cost of a bank loan is always higher than the interest paid on the bonds. So your example would be a loser. The borrowed funds have to be invested much better than that. Warren Buffet would use the $10,000 to buy a business that he could sell for $20,000. Then use the first $10,000 to pay off the loan and walk away with the profit.
Sure you can do that but you would be loosing money, yes?
People used to fix their credit in the mid to late 80’s doing this back in the day. Getting open lines of credit that they pay off rapidly (not quicker than 6 months or it won’t count) over and over again. Before you know it the open lines of credit become unsecured and your credit is repaired.
But again you are loosing fees and financing and really only gained the improved credit ranking from doing that.
So again, you could do that but wouldn’t you still loose money?
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It’s possible that a bank would loan you money in this scenario. The conundrum is that the cost of a bank loan is always higher than the interest paid on the bonds. So your example would be a loser. The borrowed funds have to be invested much better than that. Warren Buffet would use the $10,000 to buy a business that he could sell for $20,000. Then use the first $10,000 to pay off the loan and walk away with the profit.
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