Defeased Securities
See: Defeasance.
The Hollywood Golden Age comedian Bob Hope once said, “A bank is a place that will lend you money if you can prove you don’t need it.” From a corporate or institutional perspective, issuers of defeased securities fit that bill. A defeased security is one where the issuer has already established set aside cash or other security amount in escrow to cover the entire issue’s principal and interest to maturity.
One might ask, “Why borrow if they already have the money?” The answer often has to do with having the extra capital on hand for flexibility in seizing financial or business opportunities, such as refinancing at a lower interest rate. Given that they are already collateral-backed, a defeased security is automatically a AAA-rated security and will likely have a smaller coupon to adjust for the lower risk.
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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]