Our recent adverts in Euro Weekly have attracted much interest from clients but have apparently received scathing comment and criticism from many local brokers and financial advisors. Clients are attracted to the possibility of higher returns while brokers believe the potential returns being offered are unrealistic and unattainable. At least the clients make enquiries about the investment and the means by which such returns are possible, the brokers simply dismiss the matter out of hand as being totally impossible.

These diverse views and comments have been caused by the part of an advert placed by ourselves that reads:
"AAA" Rated Guaranteed Bond Funds: Under an exclusive arrangement with an offshore international bank we are able to offer facilities that can generate income returns in Euros of up to 15.5% p.a.

Such Bond Funds do exist and have represented a major part of most investment portfolios for many years now and they do produce good sound income returns whist giving protection to capital value. Of course, if you were simply to invest into the fund you could expect to receive an income return of around 5.5% p.a. and this is a long way short of the 15.5%p.a. stated in the advert.

However, we state in the advert that we are able to offer facilities from an offshore bank and if used in conjunction with the Bond investment could generate returns in line with those quoted.

For many years investors have used gearing or leveraging facilities to increase capital investment. In layman's terms, that means a bank will lend capital to enable an investor to invest a greater amount into an investment over and above what he could finance himself. In most of these scenarios the investor will have to give personal guarantees to the lender and would have to possess other assets to repay the lender should the investment go wrong. Obviously such investments would represent extreme high risk and should only be entered into by investors with experience and other resources.

However, where the lender has many years experience of an investment and as a result has absolute confidence in its performance and stability, they will lend on the security of the investment alone. The "AAA" Rated Guaranteed Bond Fund is an investment that falls into this category. It is an extremely low risk investment.

If the funds are borrowed in the same currency as the investment then there is no currency risk, if the loan were in a different currency then a currency risk would have to be taken into consideration. Certain currencies can be extremely volatile against each other ( Yen or US$ to Euros) however, by selecting currencies that are historically stable to each other, this risk can be greatly reduced.

Interest rates on loans can change and this would represent another risk. However, if the interest were fixed for a given period, say one year, then this risk can be removed during that period.

Examples of Potential Returns From Gearing:

Own Capital	10.000	10.000	10.000	10.000	10.000
Borrowed	0	10.000	20.000	30.000	40.000
Invested	10.000	20.000	30.000	40.000	50.000
Yield	5.5%	5.5%	5.5%	5.5%	5.5%
Income	550	1.100	1.650	2.200	2.750
Loan Interest At 2.75%	0	275	550	825	1.100
Net Return	550	825	1.100	1.350	1.650
% Overall Return	5.5%	8.25%	11.0%	13.75%	16.50%

The larger the gearing, the greater the risk but also the greater potential returns. Identify and quantify the risks and then compare that to potential return and only proceed if you can justify the risk.

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