The Power Leveraging and how it works assuming a higher return than the interest cost

2 For 1 Loan
Investor establishes amount to borrow against pledged assets, In this example $40,000 of assets in the form of either a combination of: (unresgistered mutual funds or stocks, GIC’s, bank notes, cornmercial paper, cash).A leverage loan is established at 7% interest with a lending institution.

Your pledged Assets	Loan (amount leveraged against pledged assets)	Total Invested
$40,000	+ $80,000	= $120,000

You now have $120,000 fully invested in the market as opposed to having only $40,000. The rate of return on your total borrowed sum of $80,000 assuming a rate of 10% would be computed as follows = $80,000 @ 10% = $8,000 yield. The interest payment for the year on the $80,000 (the amount borrowed) assuming 7% as shown by our example indicates it would cost you $5,600. Furthermore, assuming that you are in the highest tax bracket, 50% for argument sake, the net effect with a leverage loan and taking into consideration your tax structure would be computed as follows:

Return @ 10%	= $8,000
Interest cost 7%	= ($5,600)
Tax credit* 50%	= $2,800
return on $80,000	= $5,200

* based on a marginal tax of 50%. Credit on tax return from investments in interest and income producing securities.

$5,200 return on $80,000 =6,50% yield

Please note that for investment purposes the interest payments are fully deductible and therefore reduces your taxable income based on your tax bracket. The deduction on your taxes would be beneficial since it would reduce your taxes even further. No taxes are levied on your $8,000 return, because it is assumed that you are invested for a long period and therefore you haven’t disposed of your position. Taxes are only applied once you dispose or sell your position. You then trigger taxes on your gains.



The power of Leveraging and how it works assuming a lower return than the interest cost

2 For 1 Loan
lnvestor establishes amount to borrow against pledged assets. In this example $40.000 of assets in the form of either a combination of: (unresgistered mutual funds or stocks, GIC’s, bank notes, commercial paper, cash). A leverage loan is established at 7% interest with lending institution.

Your pledged Assets	Loan (amount leveraged against pledged assets)	Total Invested
$40,000	+ $80,000	= $120,000

You now have $120,000 fully invested in the market as opposed to having only $40,000. The rate of return on your total borrowed amount of $80,000 yields a lower rate than your rate of 7% interest charged. ln this example it is assumed that we generate a 4% yield return. The amount would equate to $80,000 @ 4 % = $3,200. The interest payment for the year on the $80,000 (the amount borrowed) assuming 7% as shown by our example indicates it would cost you $5,600. Furthermore, assuming that you are in the highest tax bracket, 50% for argument sake, the net effect with a leverage loan and taking into consideration your tax structure would be computed as follows:

Return @ 4%	= $3,200
Interest cost 7%	= ($5,600)
Tax liability 50% tax bracket	= $2,800
return on $80,000	= $400

$400 return on $80,000 = 0.50% yield

Please note that for investment purposes the interest payments are fully deductible and therefore reduce your taxable income based on your tax bracket. The deduction on your taxes would be beneficial since it would reduce your taxes even further. No taxes are levied on your $3,200 return, because it is assumed that you are invested for a long period and therefore you haven’t disposed of your position. Taxes are only applied once you dispose or sell your position. You then trigger taxes on your gains. This example shows you that even with a lower rate of return (4%) compared to (7%) interest charges one can still come ahead because of the tax credits.