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Guaranteed 8.2% return

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  • #16




    When I asked him what it was, he threw out “Bank note” and says his last transaction was with Chase bank. He didn’t really know what he was investing in.

     
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    This is the real problem...if your dad can't understand it enough to explain to you, he shouldn't own it. Period.

    As others have said, without more info it's unclear if this is a hard money loan or a structured note or something else. If your dad consents, maybe OP should have a chat with the financial adviser to understand the "note" and any other complex investments.

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    • #17
      The notes that my "friend" wanted me to buy were issued by an investment bank.  I don't recall which one.  They were tied to the performance of certain companies, I believe Facebook was one. Different notes were tied to different stocks.   If the stock went down below a certain level I would lose the interest, and principal as well.  It was my understanding that the purpose of these notes is to protect the company in the event of market downturns, in which case the company would be unable to raise money.  In that event, they would take my money and keep it.  My conclusion was that 8+% interest was either too much for a sure thing ( why would Facebook, Apple, etc stock go down that much?) or too little ( a risk of losing all my money for a paltry 8%).   Since the net result of this transaction was that Mark Zuckerberg and Chase/Goldman-Sachs/Citibank were borrowing money from me, I decided that the 8% was too little.  Mark Zuckerberg and Citibank were not trying to do me a favor.  Neither was my salesman friend.

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      • #18




        The notes that my “friend” wanted me to buy were issued by an investment bank.  I don’t recall which one.  They were tied to the performance of certain companies, I believe Facebook was one. Different notes were tied to different stocks.   If the stock went down below a certain level I would lose the interest, and principal as well.  It was my understanding that the purpose of these notes is to protect the company in the event of market downturns, in which case the company would be unable to raise money.  In that event, they would take my money and keep it.  My conclusion was that 8+% interest was either too much for a sure thing ( why would Facebook, Apple, etc stock go down that much?) or too little ( a risk of losing all my money for a paltry 8%).   Since the net result of this transaction was that Mark Zuckerberg and Chase/Goldman-Sachs/Citibank were borrowing money from me, I decided that the 8% was too little.  Mark Zuckerberg and Citibank were not trying to do me a favor.  Neither was my salesman friend.
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        This is always my exact takeaway. You're basically pigeon holed into this barely win situation, and youre not well compensated for any of the actual downsides. Structured notes are made by the investment banks to simply generate fees. They usually cap the upside and keep anything above the upside limits, and while they might eat a bit of downside, they get their pound of flesh there in reality as well (accounted for with fees and their position on future probabilities of things affecting the note).

        If someone was generally interested in something of this nature, and wasnt simply just listening to a pitch because they answered the phone then they could actually structure something similar themselves pretty easily. However, whenever I feel like doing something like that I usually end up in the same place again as AlexxT mentions, why sell a put and get assigned a stock I thought would be great at X price when I know I'll be angry at myself when its X-30% and what I got wasnt worth it in the first place. Few people are really trying to structure in some exact zone of return/risk profile given a level of income generated. They are really thinking they will get the money from the derivative/leveraged positions and all the upside in the underlying position. Its playing to our greed.

        If you still wanted to do it, it could be done with much more favorable terms (because you'd be choosing them) and for far far cheaper. The banks pitch these to you because you bear the majority of the risks and they generate income for themselves in addition to all the upside over the terms of the note.

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        • #19
          When this “opportunity “ was first described to me by my “friend “ he called it a bond. I said it was more like on options scheme. It turns out that he was correct. Technically, these notes are bonds. So people buy them because they are “bonds” issued by a big company, and yield 8%, not understanding the options they are tied to and the corresponding risks of loss.

          With a bond, you lose if the stock goes to zero ( actually, even then you may get your money back). With these notes, you lose everything if the stock drops below the option price.

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          • #20




            When this “opportunity “ was first described to me by my “friend “ he called it a bond. I said it was more like on options scheme. It turns out that he was correct. Technically, these notes are bonds. So people buy them because they are “bonds” issued by a big company, and yield 8%, not understanding the options they are tied to and the corresponding risks of loss.

            With a bond, you lose if the stock goes to zero ( actually, even then you may get your money back). With these notes, you lose everything if the stock drops below the option price.
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            I guess thats true, its a note and therefore a bond, but its a bond thats tied to a complicated index/options scheme. There are tons of ETNs that are terribly risky products and cant really be thought of as a bond. Placing the bond name on it serves to give investors a false sense of security.

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            • #21
              Perhaps its a hardmoney loan?  You can easily get a 8-10% (annualized) return on hard money loans.  Therefore technically the 8.7% rate may be a guarantee, however there is no guarantee someone would not default on the loan.

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