Buying bonds / investing with interest free loan.

errlloyd

I have a theoretical question. AIB offer an interest free student, up to 10,000e interest free for 5 years for specific faculties. After 5 years you have to pay interest at the normal graduate rate.

If you were a student who was financially stable, what would stop you using this loan to buy bonds for example, earning the 3% or whatever for 5 years and then just paying back the lump sum. Ultimately it would be worth about 1.5k to you during your time in college?

Are you taking on risk by investing money you don't own. What are the best risk free rates at the moment?

Would this damage your credit rating? Or would responsible use of credit improve your credit rating?

Gloomtastic!

I'd imagine 100's of 1000's of companies have been launched or cashflowed by car loans so there is no impediment to you using your student loan for whatever you want.

Your credit rating however, is based on your ability to repay loans or credit. If you pay what's due on time, you get a good one. If you don't, you get a black star against you.

Good luck with the Bond Buying. I know nothing about it but is it really worth the effort for 3%? (Minus agent fees I'd imagine, and tax of course)

errlloyd

Wouldn't be for me really, I'm a fknal year with a job next year. Although, it's still the only time in my life I'll be offered free credit. 3 percent is pretty messily, but it'd pay the water charge twice over!

The loan has one condition, you can take out any amount but only once. So my other half only wants 2k, but if she gets 2k she prevents herself ever getting the rest. So I guess for her she could whack the other 8k on deposit somewhere, earn some interest and get something out of it.

pedroeibar1

errlloyd wrote: »

I have a theoretical question. AIB offer an interest free student, up to 10,000e interest free for 5 years for specific faculties. After 5 years you have to pay interest at the normal graduate rate.

If you were a student who was financially stable, what would stop you using this loan to buy bonds for example, earning the 3% or whatever for 5 years and then just paying back the lump sum. Ultimately it would be worth about 1.5k to you during your time in college?

Are you taking on risk by investing money you don't own. What are the best risk free rates at the moment?

Would this damage your credit rating? Or would responsible use of credit improve your credit rating?

Here is a theoretical answer. “Interest free students” have no business in that field because all students should be engrossed in their courses. Nor am I convinced that €10k would do much for “specific faculties”, although it would pay for some reading glasses and hearing aids. The “normal graduate rate” depends on the college and the course. Also, if you borrow money you own it and create a liability in return.

In assessing bond pricing what you need to do is to let the bond price volatility be described by a stochastic process of the same type as that of the short rate and use Matlab to generate sampling paths. That way you can then calculate the bond prices in the models with stochastic volatility. It also would be a good idea to use asymptotic methods to derive a stochastic volatility alternative to the classic Vasiˇcek model. With that as a baseline you could then compare the prices with the classic versions of the respective models. Given the amounts involved IMO it would be overkill to investigate parameter monotonicity in these alternative models.;)

What that really means is that buying bonds at a 3% coupon puts the buyer in the realm of Cyprus or Greece. Not for me.