Buying on Margin: The Interest lÛªavs
WithÛªinterest rates risingÛÓand most experts believe they are heading even higherÛÓbuying on margin can allow you to make the most of the rates,</br></br>This strategy is risky from two standpoints, First, you are leveraging your investment and can be hurt if the market goes against you. Also, the credit quality of bonds you purchase can pose a risk.</br></br>Buying.bonds on margin is similar to buying stocks on margin. The difference is that the bondÛªs coupon (the interest it pays) can help offset the interest you pay on tbe debit balance in your margin account (the money the brokerage lends you).</br></br>For instance, if you buy a listed corporate bond, you put up 25 percent of the market value or 10 percent of the face value, whichever is greater. Right now, th^interest you would pay on your debit balance is about 12 percent.</br></br>If you were to buy $100,000 in BBB-rated Chrysler Corp. bonds paying 12 percent at 93 (that is, $930 a bond), you would put up 25 percent of $930,000 ($23,250). Your debit balance, upon which you pay 12 percent interest, a the remaining 75 |iercentu>M69,750. Annually, you would pay $8,370 interest.'JJtft-you earn $12,000 a year in coupon income, so your ÛÏpositive interest carryÛ is $3,360. ThatÛªs more than the $2,790 in coupon income the same bonds would pay if you bought $23,250 worthÛª flat out.