California IOU Math

Let's look at 2 different options.

Option 1 is to sell your California IOU to a 3rd party for 85 cents on the dollar.

Option 2 is to work with your existing bank and take out a short term loan. It is likely that your bank will "hold" your California IOU as collateral for this short term loan. They will probably charge a very reasonable interest rate for this loan but let's use a higher-than-likely APR of 10% for this example just to be safe.

We will look at both options assuming you have an IOU in the amount of $5,000.

Option 1 - You will receive 85% of the face amount. In this example you will receive $4,250 and lose out on a grand total of $750.

Option 2 - Because you will be borrowing this money for a total of only 82 days (or less the closer we get to October 2nd), at a 10% APR, your total interest payment to borrow $5,000 will be only approximately $112.
In 82 days (or less) you will be able to redeem your $5,000 IOU. You will receive a total of approximately $5,042 for this note (because California will pay the face amount plus interest at 3.75% APR). Since it has cost you $112 total to borrow this money, you end up with a total of $4,930 of your original $5,000. Instead of losing $750 as in Option 1, you are losing only $70. And remember, this assumes a more agressive interest rate from your bank than they are likely to charge in reality and also assumes that you make this transaction on July13th.

The closer we get to October 2nd, the more extreme the results become and the more money you will keep by choosing Option 2.

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