Abstract:

Capital Appreciation Bonds are similar to zero coupon bonds and not the more typical current interest bond. They are issued for periods well in excess of the normal 25 year municipal bond. In addition, a normal payback for a municipal bond is 2 to 3 times the amount borrowed at the municipal bond’s issue while it is as much as 1,800 times for Capital Appreciation Bonds. This paper explores Puerto Rico’s debt issues and the compounding and perpetuity effect on those debt issues by the use of Capital Appreciation Bonds. The serious problems of Puerto Rico’s debt structure, past and probable defaults, and underfunded pensions are explored through the intertwining of their debt issues between agencies. This misjudgment and poor fiscal oversight by Puerto Rico effectively insures another more serious crisis, even if they weather their current situation, the next debt crisis will have far reaching consequences on their pensions and economic future.