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Last year the Poway Unified School District made a deal: It borrowed $105 million from investors to fund a final push in its decade-long effort to revamp aging schools.
In many ways, the deal was unspectacular. Some of the money was used to pay off previous debts from delayed and over-budget construction projects. The rest went towards finishing upgrades that Poway taxpayers had been promised as far back as 2002. To a casual observer, it was just another school bond.
But Poway Unified’s deal was far from normal.
In 2008, voters had given the district permission to borrow more mone
And, "With advice from an Orange County financial consultant, the district borrowed the money over 40 years in a controversial loan called a capital appreciation bond."
"Voters had agreed back in 2002 to allow the district to borrow $198 million to bring state-of-the art facilities to 24 schools. But by 2008, the district was asking for $179 million more to finish the job."
Zero-Coupon
Tax-exempt capital-appreciation debt is similar to so- called zero-coupon bonds, except that the investment return on the principal is reinvested at a compound rate until maturity. The securities usually yield more than coupon bonds to compensate investors for the longer holding period before they receive any income.
Jeff Horwich: I know we're done with "the numbers," but here's one more fun one: 834 percent. That's the interest a school district near San Diego will pay to private investors who funded a recent bond referendum. The Poway Unified School district borrowed just over $100 million for building renovations.
.....except that the investment return on the principal is reinvested at a compound rate until maturity.....
Originally posted by Aloysius the Gaul
reply to post by fnpmitchreturns
.....except that the investment return on the principal is reinvested at a compound rate until maturity.....
How is that not compound interst??
“If you had raised taxes in the beginning in order to have money coming in to be able to borrow in a normal way,” Carless said, “it could have ended up being much cheaper at the end of the day because you wouldn’t have had to have this crazy exotic financing.” Source: Poway Unified to Pay Nearly 10 Times What it Borrowed: Report | NBC 7 San Diego
Originally posted by Aloysius the Gaul
reply to post by fnpmitchreturns
I'm not a guru either - so I'm keen to get an understanding
As I read it, the "investment return" is not beign paid off for 20 years, so it is being added to the capital, and then interest is due on the increased amount - hence compound interest. (sorry if the following appears to be me trying to teach you how to suck eggs!)
I didn't notice what the interest rate was in the article - but say you borrow $100 at 5%, then you owe $5 in interest after 1 year. If you do not pay that $5 then it is added to the $100 and you now owe $105.
In the 2nd year you have to pay 5% of $105 =$5.25. Again if you do not pay this off it gets added to the capital - now you owe $110.25.
In the 3rd year you have to pay $5.51 interest, etc.
IIRC if you are paying 5% the capital will double in 15 years, if 6% it will double every 12 years, if 7% it almost doubles (1.97 x) in 10 years (so will be almsot quadruple in 20 years!), and so on.
So at 5%, after 20 years you now have to pay back a loan that is 2.65 times the original (or 3.2 times if at 6%, or 3.87 times if 7%) - and now you are paying interest on that increased total amount as well as trying to pay down the principle.
it's really REALLY bad deal for the next generation!!!
But hey - you can do it without paying extra taxes as long as your lender thinks you are going to be around that long!!edit on 7-8-2012 by Aloysius the Gaul because: (no reason given)
Originally posted by Aloysius the Gaul
reply to post by fnpmitchreturns
I didn't notice what the interest rate was in the article - but say you borrow $100 at 5%, then you owe $5 in interest after 1 year. If you do not pay that $5 then it is added to the $100 and you now owe $105.
t long!!edit on 7-8-2012 by Aloysius the Gaul because: (no reason given)