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Finance: What is Defeasance? 21 Views
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Description:
What is Defeasance? Defeasance is the process by which a borrower accumulates cash or other liquid assets sufficient to retire significant portions if not the entirety of outstanding debt obligations that amount to a wash on the company’s balance sheet. This allows the debt to be effectively paid off without incurring prepayment penalties.
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- Finance / Finance Definitions
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- Subjects / Finance and Economics
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- Terms and Concepts / Accounting
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Transcript
- 00:00
finance a la shmoop what is defeasance? oh it's been a tough slog for our [Superman flying through the air]
- 00:08
friends Superman competition from x-men Iron Man Facebook
- 00:13
yeah he's just cutting well tired so needing something else to do he finally
- 00:18
built a home in his Fortress of Solitude nice four-bedroom ranch house with an [Ranch house bedrooms appear]
- 00:23
enclosed patio all new steel appliances and an open-concept kitchen for you know
Full Transcript
- 00:28
when the Louis comes by or some of the guys but work has been slow so we had to
- 00:33
take out a mortgage yeah a million bucks and well you know he wanted a nice man
- 00:37
cave although Batman still rules the roost in
- 00:40
that department but we're not gonna go there [Batman in a cave]
- 00:42
anyway the mortgage cost 6% a year what he had bad credit all those buildings
- 00:47
Superman wrecked yes someone's gonna pay for him right so the million bucks cost
- 00:50
60 grand a year to rent and that rent well it kind of stresses him out he
- 00:55
wants to not have to worry you know so what does he do well he buys bonds yeah
- 01:01
Superman buying bonds he had some extra cash left over from well when the city
- 01:05
of Metropolis rewarded him financially for you know reversing time to save that [Earth spinning]
- 01:10
busload of kids in fact he had 800 grand just sitting around and the bonds he
- 01:15
bought had a yield of 7% or said another way he collected rent on his eight
- 01:21
hundred grand of 56k a year and that helped a ton because that 56k covered
- 01:28
almost all of the 60k he had to pay on his mortgage and note that Superman just
- 01:34
cuz he's you know Superman he didn't pay any taxes so gross is net here people so
- 01:39
said another way soup here defeased all but four grand of his mortgage
- 01:44
obligation in buying those bonds which offset his monthly cash costs and why
- 01:50
wouldn't he have just paid off the mortgage well for this story there's a
- 01:54
prepayment penalty meaning he's not allowed to pay off early without all
- 01:58
kinds of cash penalties you know in the bank loaned him the money they wanted to
- 02:02
be certain to get the minimum amount of interest payments over the shortest
- 02:06
possible time period you know to make up for all that perceived risk [Superman cartoon moving steel gurder]
- 02:09
considering all the high-powered enemies he's you know facing all the time
- 02:13
because yeah when it comes to risk it's a you know kind of Superman's kryptonite [Superman screaming]
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