Post by goldservice on Aug 20, 2014 10:24:02 GMT
On another thread someone said, en passant, “BTW it is not a good idea to build up a portfolio by purchasing at a high premium. The occasional fantastic bargain, perhaps.” It was prompted by the statement “I bought 5 parts in loan 5320 (BR 12.1%, risk band A) with 3% premium”. I’ve pondered this at length but can’t see why it’s not a good idea. About a third of my holding is from the SM, at various premiums. I am happy with that as my gross yield is 11.6% and estimated fully diversified return is 9.0%.
When I started using FC, one of the first things that puzzled me was that there seemed to be a triple whammy when I bought parts. First, I had to pay a high premium to get that tasty loan part; second, the rate was the reduced buyer rate; third, my annualised return got hammered. It’s really only one thing that is happening but it is presented thrice and this put me off buying parts for a while. Perhaps other new users are also discouraged by this. Or perhaps I worry too much.
I soon realised that a buyer rate of 12% after paying 3% premium masks an actual rate (being paid by the borrower to me) of around 14%. So either I get 14% pa and pay 3% premium once or I get 12% pa and there is effectively no separate premium to pay because the buyer rate of 12% has included it. Either way, the deal is attractive for a risk band A part given that my target is 8.5% fully diversified return.
I ignore the annualised return figure as it seems to spread the premiums paid over only a year even though the loan part may pay interest for several years.
There are sometimes lots of ‘fantastic bargains’ at around 12% (subject to exposure limit, risk band etc). Why restrict oneself to buying them only occasionally? Have I misunderstood something?
When I started using FC, one of the first things that puzzled me was that there seemed to be a triple whammy when I bought parts. First, I had to pay a high premium to get that tasty loan part; second, the rate was the reduced buyer rate; third, my annualised return got hammered. It’s really only one thing that is happening but it is presented thrice and this put me off buying parts for a while. Perhaps other new users are also discouraged by this. Or perhaps I worry too much.
I soon realised that a buyer rate of 12% after paying 3% premium masks an actual rate (being paid by the borrower to me) of around 14%. So either I get 14% pa and pay 3% premium once or I get 12% pa and there is effectively no separate premium to pay because the buyer rate of 12% has included it. Either way, the deal is attractive for a risk band A part given that my target is 8.5% fully diversified return.
I ignore the annualised return figure as it seems to spread the premiums paid over only a year even though the loan part may pay interest for several years.
There are sometimes lots of ‘fantastic bargains’ at around 12% (subject to exposure limit, risk band etc). Why restrict oneself to buying them only occasionally? Have I misunderstood something?
