Friday, February 15, 2008

My Carpet Arbitrage

Please be careful with the information in this post, errors in timing could be costly.

Definition of Arbitrage: The activity of investing in order to profit from a difference in market prices.

My "Carpet Arbitrage" started in January 2007. I was remodeling the basement and it was time to get new carpet for the rec room. After weeks of getting prices from various companies to carpet the basement I found both the carpet I liked and a price I was comfortable paying. I had enough for the carpet, padding and installation saved up. So I was ready to get the carpet.
"That's nice, but so what?" you think. Well this particular purveyor of Persians [I didn't purchase a Persian rug, I just liked the alliteration] was offering 15 months of no interest financing. So being the financially astute individual that I am I accepted the offer.

This is where the arbitrage begins. By leveraging the cost of the carpet, [$3,500 - its a big area] which I was prepared to pay that moment, with the zero interest financing. I was going to be able to use that money for the next 14 months. Since it is such a short period of time, my aversion to risk led me to opening a 6 month certificate of deposit at my favorite credit union. The reason for the 6 month CD was due to the flat yield curve for interest rates. The rate on the CD was 5.25%. That nets me $91.88 for the first 6 months. The rate that the credit was offering didn't change during the term of the original CD so the rate for the second CD will be the same. I will be up to $186.17 at the end of 12 months.

Even though no payment are required by the terms of the no interest loan I have been putting a little bit towards the balance each pay period. The hope with this part of the plan is to have very little to pay back at the end of the 15 months. An I'm not losing that much in interest because the checking account that I'm using is not interest bearing. I suppose I could be setting this money aside in a money market account but my plan caters to my risk aversion. Maybe next time an arbitrage opportunity arises I'll take that path.

The plan for the final 2 months is to move the balance to my eTrade savings account which is currently earning 5.05% this will bring me to a grand total of $218.43. Not to bad for a little bit of money management.

The reason for the warning is if you don't payoff the loan before the end of the no interest period they sock you with the interest that you would have paid for the 15 months. This is typically the case with no or low interest structured retail loans.

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