Defeasance
It’s been a tough slog for our friend, Superman. Competition from Xmen. Iron man. Facebook.
He’s just gotten, well…tired. So, needing something else to do, he finally built a home in his Fortress of Solitude. Nice, 4-bedroom ranch house, with an enclosed patio, all new steel appliances and an open concept kitchen. For when Lois comes by, or some of the guys.
Work has been slow, so he had to take out a mortgage (a million bucks' worth), and yeah, he wanted a nice man cave. Although Batman still rules the roost in that department. Anyway, the mortgage costs 6% a year.
What? He had bad credit. All those buildings he wrecked? Someone's gotta pay for them, right? So the million bucks costs 60 grand a year to rent. And that rent kinds stresses him out.
He wants to not have to worry. So what does he do?
Well, he buys bonds. He had some extra cash left over from when the city of Metropolis rewarded him financially for, uh…reversing time to save a busload of children. In fact, he had 800 grand just sitting around, and the bonds he bought had a yield of 7%. Or, said another way, he collected rent on his 800 grand of 56k a year.
And that helped a ton, because that 56k covered almost all of the 60k he had to pay on his mortgage. Supe here defeased all but 4 grand of his mortgage obligation in buying the bonds to offset his cash costs. And why wouldn’t he have just paid off the mortgage?
Well, for this story there’s a prepayment penalty, meaning he’s not allowed to pay off early without all kinds of extra cash. When the bank loaned the money, they wanted to be certain to get the minimum amount of interest payments…over the shortest possible time period...to make up for all the perceived risk, considering all the high-powered enemies he’s facing.
Because when it comes to risk, it’s, uh...kinda Superman’s Kryptonite.
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Finance: What is Defeasance?21 Views
finance a la shmoop what is defeasance? oh it's been a tough slog for our [Superman flying through the air]
friends Superman competition from x-men Iron Man Facebook
yeah he's just cutting well tired so needing something else to do he finally
built a home in his Fortress of Solitude nice four-bedroom ranch house with an [Ranch house bedrooms appear]
enclosed patio all new steel appliances and an open-concept kitchen for you know
when the Louis comes by or some of the guys but work has been slow so we had to
take out a mortgage yeah a million bucks and well you know he wanted a nice man
cave although Batman still rules the roost in
that department but we're not gonna go there [Batman in a cave]
anyway the mortgage cost 6% a year what he had bad credit all those buildings
Superman wrecked yes someone's gonna pay for him right so the million bucks cost
60 grand a year to rent and that rent well it kind of stresses him out he
wants to not have to worry you know so what does he do well he buys bonds yeah
Superman buying bonds he had some extra cash left over from well when the city
of Metropolis rewarded him financially for you know reversing time to save that [Earth spinning]
busload of kids in fact he had 800 grand just sitting around and the bonds he
bought had a yield of 7% or said another way he collected rent on his eight
hundred grand of 56k a year and that helped a ton because that 56k covered
almost all of the 60k he had to pay on his mortgage and note that Superman just
cuz he's you know Superman he didn't pay any taxes so gross is net here people so
said another way soup here defeased all but four grand of his mortgage
obligation in buying those bonds which offset his monthly cash costs and why
wouldn't he have just paid off the mortgage well for this story there's a
prepayment penalty meaning he's not allowed to pay off early without all
kinds of cash penalties you know in the bank loaned him the money they wanted to
be certain to get the minimum amount of interest payments over the shortest
possible time period you know to make up for all that perceived risk [Superman cartoon moving steel gurder]
considering all the high-powered enemies he's you know facing all the time
because yeah when it comes to risk it's a you know kind of Superman's kryptonite [Superman screaming]