A "smarter" way to purchase a yacht

Depends if the tax consequences of the bonds outweigh the the tax advantages of holding the note, as well as whether the structure of the company allows it to have strictly passive income.

This is a question for the accounting professionals to determine on an individual case basis.

It is a fairly common fallacy that bonds are 'safe' investments and in the recent past, this has been the case, especially given the Fed's Quantitative Easing.
However, if interest rates begin to rise, the values of certain notes, for example, ten year Treasuries, will lose something on the order of 5% for every 1% gain in interest rates.

Some pundits claim that we are peering over the horizon at a largish bond bubble. PIMCO, the bond kings, have lessened their exposure to bonds which is kinda like the Pope lessening his exposure to Catholicism.

As the Fed continues to print money, it's just a matter of time before inflation rears it's head and rates begin their inexorable rise.

Perhaps with a large initial down payment of 10-20%, the bondholder would be protected against such an environment.

Two very correct comments. I can only add that as with most "hedge schemes", down at the bone you are still making the good old "risk Vs reward" decision. Sure there are ways to do it right and wrong, but, as already mentioned, it takes good knowlege of what you are doing, so be extra careful with "free money" because it more often then not have some added risk factor or opportunity cost even if you don't see it at first.

The kind of income used to pay off the debt is also relevant. If it is an active income that you can reasonably expect to index with inflation, then higher inflation is actually a good thing for you as your debt gets effectively cheaper - a winning you won't enjoy with bonds (as Loren explained).

Study (until you have a very firm understanding) of Time to Use (Value) of Money and then come back to your scenario of purchasing bonds to hedge your boat and its purchase cost(s).
At the end of the day, there is no free money. There is no black magic. They are paid for by hard earned money.

This also opens Pandora's box for accounting, taxes, both ingress and egress on for both sides of the equation.

In my humble opinion, the "smartest" way to purchase a boat is to get out and make a grip of money. Once that's done, find a broker, surveyor and captain you trust with your life, and pay cash. Then go make another pile of cash to maintain the boat you just bought. Through this, (your experience may be different) you will learn to hate money.

Or hate the money pit (I mean yacht) that you just plunked all of that pile of hard earned cash on! hehehe.......

Years ago a fellow wanted to "give" me a boat for free. He wanted me to set up a charter operation. He'd finance the operation with a scheme involving treasuries & bonds. He bought us 3 lunches before the words "$50,000 good faith money" slid into the conversation. When I hear creative financing that involves me, I don't deal.

I could see something like this working but would be an off market transaction,
where company 'A' issues bonds to company 'B', where company 'A' owns the yacht and company 'B' is the investor.

but at current interest rates I could not see the point.

have seen this type of thing done to finance factories and property.
so could not see a problem with a yacht as the asset.

Well technically speaking, there is a free money - for you - when you trade out your risks and rewards in such a manner that you get the good end of the deal. Not an easy thing to do, but certainly possible. (And provided you don't lie, cheat or put a gun to anyone's head, I can see no moral problem with that either).

It does require a good understanding, so the rest is absolutely true.

I go through that stage as well. I think we all do. Par for the course for any boat owner.

Again, Time to use of Money.
You can go buy a 1B CMO type bond from a known provider (JPMC) with a .96 factor and a coupon that pays a pretty attractive rate. 10 to 12%. The duration of the instrument is 20 years, Face value of 1B, and roughly 1.2-ish million cash / per B, will buy it. Now, go study time to use of money and tell me what works with a huge liability (boat) sitting in the water. Really, you have to a very creative financial model to make this work. It's darn near gorilla math when you try to get all the mirrors to align.

Then I honestly, and humbly take my hat off to you. In the last 20 years of banging my head against the walls of technology, dot.com, silicon valleys, investment banking, vulture (err, venture) capital business, I have yet to find free money. I know where I can make money the hard way, and I know where I can leverage capital to yield higher than average returns, but it takes a grip of capital and there is *always* risk. How one mitigates that is a different thread.

We use CDs to offset business purchases of small vehicles - light trucks and trailers - because it's a way to retain earnings (and defer taxes) while also enjoying the depreciation on a work vehicle and the tax benefits of a business loan. This allows us to purchase the vehicle lien-free, essentially being our own lender while the bank is paying us to hold its own collateral.

I don't think I (or our accountants, or Uncle Sam) find the same sense in parking cash over the $30-50k range though.

You don't see a problem with holding a bond for a decreasing value underlying asset? Would you like to buy a bundle of subprime mortgages? They're structured as a bond now, with a AAA rating!

We could maybe throw in some credit default swaps and subsequent derivatives... they're essentially insurance that you'll pay yourself in case the bonds don't!

With all the respect, you quoted too selectively. Yielding higher then average returns with less then average risks generates a chunk of "your free money" in these differences. Or you may call it a "premium for being smart/connected/lucky", no point in arguing semantics.

P.S. Down where I live, there is also a literal free money, aka *I am the only official authorised to give this and that permits*, but that's even more different thread ))) It's not entirely free either, at least as long as you don't consider your dignity worthless.

So you mean like American Treasuries!!!

No as a bond holder of this type its just another way of financing, same as any loan for deprecaiting assets (at the end of the day they still need to be funded).
As these are Off market and normally inter group / company they are secured in someform by the asset, with the coupon rate being set higher then depreciation. These transactions are also normally a way to get funds to projects in places where funding is harder to get eg developing nations. There are other reasons to structure deals in this way one being Tax consessions eg.

As for your CDO's and the like totally different animals, there were no real assets except paper in most cases. So you can keep them.

Happy Yachting

Good luck finding a bank or lender that will loan to you with muni's being collateralized....... The mono insurers are so bad off (and everyone knows it) right now, that most G.O. muni's are laughable.

But we're in a "bond bubble" how could that ever be?
(I kid... I kid....)