Bonds Backed By Education Loans Prove to be a Bad Investment
Like so many investments that involve debt (subprime mortgage-backed securities, for example), bonds backed by education loans are proving to be difficult to make money with these days. Indeed, reports Forbes, bonds backed by education loans are yielding all sorts of problems:
There are bad investments, and then there are really, really bad investments.
In the $330 billion world of auction-rate securities, put bonds backed by education loans in that latter category. Not only are investors stuck with about $80 billion of the unsellable bonds, many of them are now getting paid zero interest for their troubles.
Naturally, in our system of socialized capitalism, regulators are stepping in. How can we give investors a chance to sell their un-sellable investments? The answer, much as it was for Bear Stearns investors, is to sell at a loss. But that’s even better than not selling at all, and racking up the losses. JP Morgan is offering to buy back some of its bonds, while UBS said it will be marking down their holdings.
Auction rate securities
These bonds backed by education loans are called auction rate securities. They are bonds that are considered long term, and their rates are set at auctions held every so often (anywhere between seven and 35 days). Issuers can get better borrowing terms, and investors have been able to get returns similar to cash investments.
But, while they provided returns for a time, and were considered somewhat “safe,” bonds backed by education loans were hit hard by the credit market crisis. No one wanted to step in at the auctions and buy the securities. Now investors are getting lower returns, and bond issuers are looking having to have higher interest rates.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss.
Tags: bond market, bond market news, investing blog, education loans,
auction rate securities, investments, forex trading
