Monday, March 14, 2016

Problematic Principal

So I went to the bank
To see what they could do
They said son looks like bad luck
Got a hold on you
--Simply Red

Borrowing at 0% interest seems like 'free money.' No interest to pay. You only have to pay back the principal.

But paying back the principal itself could become difficult if cash flow withers. In fact, you may have bigger payments to make because you borrowed so much at 0%.

Leverage is likely to go up when rates go down. Even with no coupon to pay, paying back principal can be problematic at high levels of leverage.

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