Bondage (adventures in finance)!

The Tribune reported, on Tuesday, that the CNMI is considering floating about $80 million in bonds. I got some email from a couple of readers asking me to look into the bondage issue. So I dialed it into my Internet browser —

Wow! Oops, wrong type of bondage…

By issuing bonds we’re borrowing money. For us, it’s one solution to the problem that so much money has been squandered here that there’s not enough to cough up to match — and therefore receive — funds from the Feds to improve infrastructure.

Infrastructure projects have two broad economic benefits. One can be thought of as the “stimulus effect,” in which money paid to construction firms flows to its employees, who in turn spend the money in local stores, and so one and so on.

The other benefit is the infrastructure itself. Better roads, improved utility services, expanded airports and such bring obvious benefits to residents, businesses, and can draw in more businesses as well.

Drawing some numbers from the Tribune’s coverage of the bond idea, we come up with a possible 6.3 percent interest rate on, say, $80 million in bonds, carried over a period of 25 years.

Bonds, unlike your home mortgage or your car loan, aren’t generally “amortized,” that is, the principal isn’t paid off over the life of the loan. Every time you make a house payment, by contrast, you’ve paid down how much you owe on the house. With a bond, though, it’s only the interest payments being made over the life of the bond.

Heck, there are even bonds (called zero-coupon) in which there aren’t even any interest payments being made over the life of the bond. Here’s an example. I buy a bond with a “face value” of $1,000 that matures in 10 years (meaning, in 10 years I’ll be paid a cool one thou). For this bond, I pay, say, $463. So my profit angle comes via the fact I’m paying $463 now, and in 10 years I get $1,000. I whip out my financial calculator and calculate that I’m earning an interest rate of eight percent per year on such a deal.

(Note to my colleagues: before you nit-pick me, I’m assuming annualized periods here, and not messing with the fact that the periods for analysis could also be quarterly, semi-annually, or whatever. OK? So chill out.)

(Note to everybody else: this bond stuff can get tangled, so I’m just looking at a few of the basic basics, which sometimes drives financial pros crazy and they begin frothing at the mouth. If you encounter such a situation, you can safely assume they’re rabid, and can thrash them like a mad- dog.)

In any case, the guy who issued the bonds has to cough up the principal when the bond matures.

The CNMI, then, can go one of two ways on this. If the market will buy bonds for 6.3 percent, then we can issue $80 million of them now, pay about five million bucks a year in interest, and, when the bonds mature, pay the $80 million back to the bondholders. Or, the CNMI can skip making interest payments, snag $80 million now from the sale of bonds, but have to pay, say, $368 million in 25 years to pay off the bonds.

Actually, the CNMI can also sort of split the difference, and issue bonds that pay interest (“coupon payments”), but also sell at a discount to the face value like our zero-coupon example.

Add to this financial heap such things as the costs of issuing bonds, and you’ll see some of the basic factors involved in bond issues. We’ll maybe be hearing more about these things in the coming months. Stay tuned.