I just saw on PenFed that Home Equity Loan is at 5.74%, 1.5 - 2% below other banks. Is there any opportunity for arbitrage with safety in mind? The highest CD I saw is 5.75%, so not much room there. I am planning to use the maximum amount of $400,000 if possible. Any ideas?
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posted: Oct. 8, 2006 @ 11:41p
xpguy
Senior Member - 3K
posted: Oct. 9, 2006 @ 1:51a
roulette in vegas
edit: on 2nd thought I take back my neg, at least you didn't phrase the question: "My friend wants to know where he can invest his 400k to earn a return above 5.74%"
ArbolLoco
Tired Member
posted: Oct. 9, 2006 @ 1:57a
threads with the word "arbitrage" in the title usually don't work out well.
taxmantoo said: Loan it out on Prosper.com for 20% And when half the people default and the other half pay you back at 12%, you'll have made 6% - a 1/4% spread over your borrowing costs!
Bonds are performing better than 5.75%, aren't they? And you get to tax defer those, as well. It's 1.40% over inflation, so somebody can do the math... I don't have the numbers for inflation.
xerty said: taxmantoo said: Loan it out on Prosper.com for 20% And when half the people default and the other half pay you back at 12%, you'll have made 6% - a 1/4% spread over your borrowing costs! the joke ------> .................you
monsieurpresident
Senior Member<br>1K
posted: Oct. 9, 2006 @ 10:13a
g10ny said: All this BT game is an arbitrage, after all.
Technically, it's "leverage" not "arb".
asdf9876
Happy Member
posted: Oct. 9, 2006 @ 10:18a
monsieurpresident said: g10ny said: All this BT game is an arbitrage, after all.
Technically, it's "leverage" not "arb".
Nope, it's arbitrage as many people do it. Finding a discrepency in the market, the difference between what a CC issuer will lend you and what you can lend a bank in this case, is classic textbook arbitrage.
You may choose to use it as leverage if you want but you are wrong that it is "not "arb"".
Arbitage: An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate.
The asset, money, has a known price in the future that does not trade at its future price discounted at the risk-free interest rate. It trades in future cost at its current cost and FDIC insured accounts make a very risk-free interest rate.
So by the above definition it fits arbitrage to the letter.
monsieurpresident
Senior Member<br>1K
posted: Oct. 9, 2006 @ 10:45a
asdf9876 said:
Arbitage: An asset with a known price in the future does not today trade at its future price discounted at the risk-free interest rate.
The asset, money, has a known price in the future that does not trade at its future price discounted at the risk-free interest rate. It trades in future cost at its current cost and FDIC insured accounts make a very risk-free interest rate.
So by the above definition it fits arbitrage to the letter.
BT does not involve owning an asset. Borrowing at x and lending at y is leverage.
asdf9876
Happy Member
posted: Oct. 9, 2006 @ 10:48a
monsieurpresident said:
BT does not involve owning an asset.
Definition of asset:
items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate
I get "cash" with my BT. I then give it to my bank who gives me a slip of paper saying I'm entitled to a certain amount of cash (i.e. accounts receivable).
I never said you couldn't use your BT for leverage.
If you borrow at x% and invest at y%....
If x% is >= the guaranteed discount rate-->leverage If x% is < the guaranteed discount rate-->arbitrage+leverage
neterch said: I just saw on PenFed that Home Equity Loan is at 5.74%, 1.5 - 2% below other banks. Is there any opportunity for arbitrage with safety in mind? The highest CD I saw is 5.75%, so not much room there. I am planning to use the maximum amount of $400,000 if possible. Any ideas? So you're going to take out 400k at 5.74% to invest at 5.75%? You'll be making .01%, or $40, before tax, assuming there are no fees or anything else involved.
Non guaranteed results are not "arbitrage", they are leveraged investing.
asdf9876
Happy Member
posted: Oct. 9, 2006 @ 11:05a
monsieurpresident said: asdf9876 said: I get "cash" with my BT.
I'd say this is a liability.
The liability is the debt I owe CC company. The cash or cash equivalent in the asset. Then I use this asset, just like many businesses do, to increase my assets so that when I pay back my liability I have assets remaining.
The difference is for what I borrow the amount given to me is not discounted at the guaranteed rate of return. In fact, it is not discounted at all. Thus it is arbitrage.
It is an idea that DaveHanson has talked about earlier in his posts about PFCU (thanks Dave). You can find CD rates of 6.3% and the spread can give you nice pocket change. I did exactly this when I opened a cash out 5/1 ARM at PFCU at 5.25% and opened a 3 yr 6.3% CD at AFCU with the cash-out.
The problem is you need to pay the extra interest out of your monthly disposable income. (you could take interest out of the CD but that reduces your net rate).
N
slimcustomer
Senior Member - 1K
posted: Oct. 9, 2006 @ 1:39p
Much of this is already discussed here - Guaranteed arbitrage opportunities. The margin in the op is too slim IMO plus allowances for loan repayments should eat in to your expected return. I would look into lower rate intro rate helocs with low or no closing costs and consider flipping them. Some might also consider keeping an eye on PenFed's 5/1 ARM. Rates were recently as low as 5.125% and matching that up with a local credit union 5 year share certificate with a 6%+ rate and a high yield savings account could make some people some nice extra cash.
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