My Personal Finance Journey

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These Unsecured Notes are Risky Business

Contributed by mm | April 8, 2004 6:33 AM PST

Kiplinger's Personal Finance says we need to conduct double due diligence (DDD :-)) study before investing in unsecured and uninsured notes.

The article introduced American Business Finance Services, a financial firm in the business of making home loans, as one example. This morning as I check, the company offers tempting interest rates that far exceeds regular financial institutions:

Uninsured Money Market Note: 4.88%
3-Month: 7.90%
6-Month: 9.75%
12-Month: 10.43%

Sounds tempting? But if you dig deeper, you will see the company is on top of a shaky foundation with a delinquency rate of 11%. As the note is unsecured, uninsured and subordinated investments, it cannot be sold in the secondary market when bad news comes, and I suspect it will have any salvage value if the company goes bankruptcy.

Actually, it is not rare for companies to direct issue debt notes to customers. For example, GE Finance offers some high yield options like GE Interest Plus (which also offers $25 sign-up bonus), which is actually unsecured senior debt. Of course GE is in AAA standing so its money market account should be safe enough, but oen should still demand a premium for the additional risk compared with FDIC-insured products. In addition, General Motors also offers GMAC DemandNotes that is paying 2.50% now.

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