A Fairly Safe Investment that yields greater than the Prime Rate plus One Percent?

[nico08]

Hi. I recently obtained an equity line of credit. the interest on the loan is the prime rate plus one percent. i believe the loan needs to be paid back within 15 years. i was just trying to find out if there are any fairly safe investment products available that would provide a return that is greater than the prime rate plus one percent. if you are aware of a product like that, can you let me know. thank you.

 

[heeyy_joe]

Research preferred stocks.

 

[braumeister]

Hi. I recently obtained an equity line of credit. the interest on the loan is the prime rate plus one percent. i believe the loan needs to be paid back within 15 years. i was just trying to find out if there are any fairly safe investment products available that would provide a return that is greater than the prime rate plus one percent. if you are aware of a product like that, can you let me know. thank you.

You just wrote about your job insecurity ...

... the large company I work for is relocating and I will probably lose my job because I do not want to move ...

and you want to increase your debt?
I would give this some very serious thought first.

 

[frank]

Do likes the banks do and see if you can get it from the fed at zero to one quarter percent. If you can do that you can make out alright.

 

[nico08]

Research preferred stocks.

I am going to do some research into preferred stocks. Thank you for you for the advice. I know that in the current market it is difficult to get anything more than a nominal return with little to no risk. And it will probably stay this way for awhile.

 

[Animorph]

The chance of your not having to pay off the loan is very low. I don't think there is a similarly low risk investment that will pay you more than the loan cost. The banks aren't entirely crazy. You'll have to take on more risk to make it work.

 

[pb4uski]

.....I don't think there is a similarly low risk investment that will pay you more than the loan cost. The banks aren't entirely crazy. You'll have to take on more risk to make it work.

+1 If there was an equally risky way to make prime plus 1% then the bank would probably just invest in that rather than make a loan to you.

 

[bUU]

We met with our financial adviser (a one year experiment) and he mentioned a few things he wanted to recommend regarding our excessive cash reserve. He mentioned, specifically, investing in bank loans, i.e., floating rate funds. I'm just starting to research them, and would appreciate any input.

 

[bUU]

Ultimately, we conclude that floating-rate funds indeed minimize interest
rate sensitivity, although at the cost of incurring significant credit risk.
As a result, we suggest that investors may be best served viewing these
funds in a light similar to that of high-yield fixed income funds, and not as
an alternative to high-credit-quality bond holdings.

[Source: Vanguard.]

 

[Gumby]

We met with our financial adviser (a one year experiment) and he mentioned a few things he wanted to recommend regarding our excessive cash reserve. He mentioned, specifically, investing in bank loans, i.e., floating rate funds. I'm just starting to research them, and would appreciate any input.

You might consider this exchange traded fund.

BKLN | Senior Loan Portfolio | PowerShares Exchange-Traded Funds

You always have default risk on the underlying loans, of course, but interest rate risk is moderated because they are floating rate.

 

[bUU]

Does this qualify as "fairly safe" though? Seems like it is no more safe than a high yield bond fund like SPHIX.

 

[jimnjana]

You might want to look at RiverPark Short Term High Yield Retail (RPHYX) fund. It does have a relatively high expense ratio. Fund has a unique niche and has had a relatively stable nav.

 

[bUU]

Thanks, but I'm already in SPHIX, which I feel is better than RPHYX, for roughly the same category of investment. I resonate with this comment I found comparing the two, this morning: "Not the same critters in function; but they are cousins. I note SPHIX, as it has a very long record of returns, is well managed and ranks 47 of 563 HY funds over the past 5 years, which of course, includes the market melt period. Since its inception, has shown RPHYX to have a slow and steady upward path when measured against swings in the traditional HY bond funds, but with about 1/2 of the total return."

I don't really like niche investments anyway.

 

[Gumby]

Does this qualify as "fairly safe" though? Seems like it is no more safe than a high yield bond fund like SPHIX.

A high yield bond fund has both credit risk and interest rate risk. In the current environment, I don't see interest rates going anywhere but up, so I would view SPHIX as more risky than BKLN.

To address the OP's question, I probably wouldn't borrow money to invest, but that's just my preference. I've never bought stocks on margin either.

 

[bUU]

A high yield bond fund has ... credit risk

Could you please explain this? I thought (probably erroneously) that the credit risk is greater with bank loan funds than with more generalized high yield bond funds.

 

[Gumby]

Could you please explain this? I thought (probably erroneously) that the credit risk is greater with bank loan funds than with more generalized high yield bond funds.

Bank loans and bonds are both rated by S&P and Moody's. You can compare the average rating of the holdings for the two funds in which you are interested, but I don't think you can say, as a general matter, that bank loans are riskier than bonds. Think about, in the capital structure for a single company, the relative priority of a senior secured bank loan versus a junior unsecured bond. In bankruptcy, the senior secured loan wins every time.

 

[TOOLMAN]

A high yield bond fund has both credit risk and interest rate risk. In the current environment, I don't see interest rates going anywhere but up, so I would view SPHIX as more risky than BKLN.

.

Thanks for the BKLN suggestion.

I am reconsidering my holding in HYG. It's now 4% of my AA. I need more bonds in my AA, but the upside of a bond index funds doesn't look appealing at this moment in time. BKLN may be a better place to be than high yield ETF's like HYG on the risk- reward - yield curve for me.

 

[ducky911]

My sleeping good at night would be at risk if I borrowed money to invest in the stock or bond market.

Prime plus one percent is not a super cheap deal. Banks have been doing well offering these to people and companies that have assets to back the risk. The typical way these work is they adjust the rate to the prime several times a year.

People are finding safe investments by paying off their home loans....you are looking to go the other direction.

Bob

is the current prime rate 3.25...4.25 loan that going to go up

 

[bUU]

Bank loans and bonds are both rated by S&P and Moody's. You can compare the average rating of the holdings for the two funds in which you are interested, but I don't think you can say, as a general matter, that bank loans are riskier than bonds. Think about, in the capital structure for a single company, the relative of priority of a senior secured bank loan versus a junior unsecured bond. In bankruptcy, the senior secured loan wins every time.

That's what I'm having trouble finding... a good way of comparing the two funds... they're rated in structurally different ways as far as I can tell. But your explanation makes sense.

 

[bob boag]

You can't escape the fact that return is inversely proportional to risk. For my kid's college money I aim for investments that are *fairly* low-risk that hopefully give decent but unspectacular return. They had an extra 40K sitting in cash that I put in FFRIX (Fidelity Advisor Floating Rate High Income Fund). It got clobbered in 2008 but otherwise chugs along at about 4%/yr return. It has the highest ER of any fund I own, 0.75%.

 

[RobLJ]

We met with our financial adviser (a one year experiment) and he mentioned a few things he wanted to recommend regarding our excessive cash reserve. He mentioned, specifically, investing in bank loans, i.e., floating rate funds. I'm just starting to research them, and would appreciate any input.

I moved some intermediate bond gains into Fidelity Floating Rate, starting in November 2011. However, floating rate vehicles are risky and can flunctuate like stock (I think the Fidelity was down 24% or so in the '08-09 crash), largely because you are taking on both repayment risk by the company, although it is generally short-term, and some bank risk. I did so to reduce interest rate risk.
See today's WSJ article: Bank-Loan Funds Pose New Risks - WSJ.com

 

[Turn_the_Page]

Sounds like giving people home equity lines of credit is yielding just what you're looking for. Oh wait, I forgot the safe part.