The Earth, The Sky and Everything In Between

I have an idea, and I'm completely serious.

Have you thought about donating money to help affected people in the Gulf? My suggestion: buy BP bonds. That's right. Lend your money to BP.

BP currently has a little under $7 billion in cash on hand. They have just agreed to fund $20 billion to support those who have suffered loss due to the oil spill. Whatever they use to back that funding, they are no doubt borrowing money to do so. Right now, Atlantic Richfield Co., a BP subsidiary, is offering short, mid, and long term bonds with high coupons and high yields at a very small premium. In laymans terms, they're offering some killer bond deals, cause they're desperate for money. Here are the possible outcomes of investing in BP bonds.

BP goes bankrupt. In restructuring, assets will be sold off to cover their debts. These debts includes your bond principal, and it includes the relief fund your bond helped to fund. You will likely get some or all of your money back. Either way, as a bondholder, you have priority of repayment over BP's stockholders, so you are in good position to recoup. 

But this is a worst case, right? So lets say BP folds, can't pay your bonds back, and you lose your investment. As unlikely as this is (and it is highly unlikely), you could still claim a capital loss on your bond position, meaning your income taxes are deducted the amount of your losses multiplied by your income tax rate. So, say you invest $5,000 in BP bonds, lose it all, and your tax rate is 25% that year. Your tax liability is reduced by $5,000, and your tax refund is suddenly $1250 greater. In case you weren't counting, that's the same tax effect as donating that same $5,000 to charity!

Best Case (and the likely case) 

BP continues to service their bonds, and pay coupons. This means that, over the life of your bond (which should closely mirror the life of the oil spill restoration efforts), your bonds will earn a rate near 6.5%. Savings accounts might earn 1% right now, at best. T-Bills are about the same, and so are CDs. 6.5% is better than 1%. Say your same $5,000 bond runs for 2 years, and earns 6.5%. That means that, over the life of your bond, your $5,000 will have turned into $5,650. That is assuming you took your coupon payments and either spent the money, or in some way just did nothing productive with it (like a savings account ;). 

In recap, assuming you have $5,000 you're thinking about donating to help people with the oil spill. You can either:

A. Donate the money to charity. 

You get a $5,000 tax credit = $1,250 refund.

B. Buy BP bonds that fund the recovery. BP can't pay, you lose all your money.

You get a $5,000 tax credit = $1,250 refund.

C. Buy BP bonds that fund the recovery. BP pays on time, and the bond matures, no biggie.

You get $5,650 in 2 years, and pay taxes on the $650 gain = $162.50 tax payment = $5,487.50 in your pocket, or $487.50 more than you started with. And you funded the recovery effort.

What say ye?