Good debt examples

H

Hannah

Member
I thought this would be an interesting topic to discuss, since I noticed this forum is for the open minded people :) I like that :)

Not all debt is bad. Sometimes, getting in debt can turn out to be a good thing! For instance, I'm trying to open up my own business (soon enough, I hope!) and I won't be able to succeed without investing in it first. So, since every entrepreneur knows time is money, I prefer not to waste mine and get a loan so I can start working on my own ASAP.
In time, I hope profits will rise through the roof (need to stay positive! :D ) so, my getting into debt would actually earn me money on the long run!

What other examples of good debt can you come up with?
 
This is easy for me to answer: having a mortgage is definitely a good investment!
Sure, it's a huge investment, but it's the only way you get to own you own home! I don't think I would ever be able to save up THAT much money to buy a house, while also paying rent! So, a mortgage is definitely the perfect good debt example!
 
Yea, own your home can be a good investment... Crashes like the one in 2008-2009 is very unusual, but if you buy a house in a good spot and take care of it should pay off in the long run.

Other then that paying rent / mortgage interests with a loan might be good in some cases, if one is sure new money will arrive shortly. Adjusting life style is also crucial if that is going to work.
 
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I think all debt is good, if and only if it's a responsible debt!
For instance, I got into debt so I could help my daughter pay her rent. It was a responsible choice, money was needed. But I would never go into debt to buy clothes or shoes, as my wife did, centuries ago, before knowing me. That is purely irresponsible money spending and it helps no one (but the banks..).
 
I bought some JCP 2yr bonds earlier this year.
  • JCP 2yr notes yielding around 18-20% at the time
  • The JCP credit curve was inverted, meaning 2yr notes were trading at a higher yield than 20yr notes. This reflects the heightened default risk
  • If you look at the pace of cash burn at JCP, look at how much cash they had on hand, and if you made some not-so-draconian assumptions on their operating metrics, then it looked like they will have enough cash to service the 2yr notes at the very least (who knows about 3yrs and beyond)
  • Bonds were also paying 7-8% coupon to make it a very positive carry trade
  • Yes despite all this I was taking a ton of risk because I don't think I necessarily understood the retailer better than the rest of the street.

JCP's earnings ultimately came in above expectations. They're slowing the hemorrhaging a little bit. The equity is up about 50-70% over the last couple of months depending on your entry point. My total return on the senior unsecured bonds is about 20-25% over the same time period. The bonds are now trading around a 6-7% yield. Not a slam dunk but not bad for a 6 month trade.
 
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