Neualtenburg Bonds

We should officially formalize the nature, return, and duration of the Neualtenburg bond. One can read up on bonds here, if there's interest.

As I understand it, our city offers bonds, sometimes known in finance as a debenture. A bond is a debt instrument that obligates the issuer (in this case the Neualtenburg Cooperative) to the bondholder the principal plus interest. Our cooperative borrows the face amount of the bond (the principal) from a buyer, pays interest on that debt while it is outstanding, and then redeems the bond at its maturity date by paying back the principal. Our bonds are currently convertible, in that they can be converted into land shares and monthly payments. This convertibility means our bonds have a "put option", which means investors can (at least partially) withdraw invested money before the maturity date.

Because this is a debenture, it's important that there is a maturity date, the date when the city returns the principal (original investment) and that the interest is not compounded like it is in a savings account. The value of a compounded account will grow exponentially in time (starts out small and then grows quickly), whereas the income of the cooperative is logistic in time (grows quickly and then levels off).

The goal should be to provide a safe and secure investment for both the investor and the city.

So things we need to decide are:

1. Rate of return, floating or fixed. This depends on the maturity date and what currency we use. For instance if we use 6% APR in L$, those who invested in US$ have already lost most of their interest to inflation.
   
2. Whether we will allow partial withdrawals (a put option). I think we should only allow partial withdraws if they are converted by the city directly to land and land-use fees.
   
3. Whether we will allow the city to pay back the bonds early (a call option). I don't think this is necessary.
   
4. The maturity date. At our current rate of growth, I think six months might be a good duration for the bonds.
   
5. Currency. Since the Cooperative is a RL entity and 90% of investments are in US$, it makes sense that the investments should be tracked in US$.
   
6. How interest is returned. Currently I believe that interest is being compounded. Should we instead issue a final value (US$1 invested becomes US$1.10 in six months) and then linearly prorate it based on withdrawal date?

~Ulrika~

Below is my recommendation for the definition of the Neualtenburg bond. The modifications would be retroactive and apply to future city bonds, if accepted.

Before giving recommendations, I wanted to define several terms used to describe bonds as a reference. This information is condensed from the Wikipedia entry on bonds.

Features of Bonds

1. par value - Par value, also known a face or principal value, is how much the bondholder will receive at maturity.
   
2. issue price - the price at which investors buy the bonds when they are first issued. The net proceeds that the issuer receives, are calculated as the issue price, less the fees for the underwriters, times the nominal amount.
   
3. coupon - the interest rate that the issuer pays to the bond holders. The name coupon originates from the fact that in the past, physical bonds were issued which had coupons attached to them. On coupon dates the bond holder would give the coupon to a bank in exchange for the interest payment.
   
4. coupon dates - the dates on which the issuer pays the coupon to the bond holders. In the U.S., most bonds are semi-annual, which means that they pay a coupon every 6 months.
   
5. maturity date - the date on which the issuer has to repay the nominal amount. After the maturity date the issuer has no more obligations to the bond holders, as long as all payments have been made of course.
   
6. callability - Some bonds give the issuer the right to repay the bond before the maturity date on the call dates. These bonds are referred to as callable bonds.
   
7. puttability - Some bonds give the bond holder the right to force the issuer to repay the bond before the maturity date on the put dates.
   
8. call dates and put dates - the dates on which callable and puttable bonds can be redeemed early.
   
9. indenture - A document specifying the rights of bond holders. In the U.S. federal and state securities and commercial laws apply to the enforcement of those documents, which are construed by courts as contracts. The terms may be changed while the bonds are outstanding, but amendments to the governing document often require approval by a majority vote of the bond holders.
   
10. rate type - The rate of return on a bond can either be fixed or floating.
    
11. convertibility - Bonds can be converted (usually on the call date) to another form of security.

Neualtenburg Bonds - The Recommendation

1. par value - I recommend a factor of 1.12 times the purchase price (the nominal) as the par value. Thus if someone purchased US$100 in N-bonds, the par value would be US$112.
   
2. maturity date - The original city bond sales took place on about the 1 Apr 2005, with the first sale on about the 1 Jun 2005. In the future, bonds should mature at six months from the date of issue. In the case of the original bonds, I recommend setting the maturity date at six months from the date of the first land sale. Thus the first bonds would mature on 1 Dec 2005 and all other bonds six months after issue.
   
3. rate type - Bonds should return at a fixed (as opposed to variable) rate.
   
4. coupon dates - Coupon dates should be monthly and coincide with land-use fee due dates such that citizens can use their coupon to pay for land-use fees, otherwise coupons are paid to them in US$ or held in a separate account (by the city bank).
   
5. callability - Bonds will not be callable (meaning the city can not opt to pay them back early).
   
6. puttability - Bonds can not be put in the traditional sense, where a bond holder can demand early repayment from the city. Instead, there will be monthly bond put dates, where a bond holder can have up to their monthly land-use fees (minus the coupon) deducted from the issue price. This will decrease the size of the next coupon and the par value of course.
   
7. convertibility - When bonds are mature they can be transferred to other city securities (currently we have no other securities.

Example

Ulrika buys US$300 worth of N-bonds. The par value would be US$336 with a term of six months. Coupon dates are every month, so there will be six monthly coupons of US$6. At the end of six months, Ulrika will be paid US$300.

Ulrika decides that she wants to pay for her US$30 land-use fees using her N-bond. After the first month, she receives a US$6 coupon and deducts the maximum allowed US$24 from her bond to cover the fee. Her new nominal, par value, and coupon after the partial call would be US$276, US$303.60, and US$5.52.


Calculations

Par value, P, is equal to the nominal, N, times a factor:

The factor, f, is equal to a monthly return times the number of months left until maturity, n:

The coupon, C, is equal to the the par value minus the nominal divided by the number of months left until maturity:


Let me know what you think. If this is acceptable, I can retroactively apply it to the existing bonds and publish a schedule for all investors.

~Ulrika~

Well... I'm not a financial expert. It seems reasonable to me, though.

I'm with Aliasi on this one. It sounds good! Even though I have no head for finacial issues. In the end though, I suppose it is really up to the guild to decide aye or nay though.

Well, it looks great so far, Ulrika

Some thoughts should be added in the case that for some catastrophic reason Neualtenburg ceases to exist I know, I know - this sounds too much like asking for trouble, and we didn't really think about that when we "bought" the first bonds.

As an example, Cyberland, a traded stock exchange company run by Shaun Altman, uses "land" as guarantee. So, if Shaun gives up the project for some reason, the shareholders will at least get some land in return.

Now, we can't do the same in Neualtenburg (private island!) but we should have a similar arrangement. I have not the slightest idea what we can "give" in return.

I also don't understand why the City doesn't have a call option. Is that to protect the investor's money, ie., make sure that the City will have to give out the coupons every month, even if the City could spare the trouble (with enough money) and simply buy all the bonds back? Hmm. Well, it makes the whole investment in bonds very more appealing if the City does not have a call option If that's the idea - encouraging people to invest in bonds - then I do fully agree with it. The original idea, though, was not to "encourage investment" but simply to get a quick way to have some spare cash while we don't reach break-even.

But I'm never against promoting investment opportunities for citizens

Excellent point. In the event that the government and cooperative dissolve, we could transfer ownership of all government-owned land to bond holders. I'll think more about this one.

Usually call options come with a penalty. If you'd like, we could allow a call option, provided the city pays some or all of the par value at call. I'd be in favor of full par value in the event of a call, myself.

~Ulrika~

I could actually live with this. But I would love to see it added to the Constitution also!

I would like to submit the bond proposal as described to the RA for ratification, with Gwyn's idea of offering land as collateral in case of dissolution. Note that this would be retroactive, meaning we'd need to go back and undo compounded additions to the balances.

If there are any additional ideas or modifications (like a change in the return), post them now. Otherwise I think it's ready for a vote.


For members of the RA, would you like bills summarized and submitted as a new thread for comments after the vote or does this format work?

~Ulrika~

I just wanna make the posters.


"For A Stronger CITY

BUY NEUALTENBURG BONDS"

Well, I think it works for me Although I wouldn't mind having it on a notecard
(I'm lazy, I know...)

As per our procedures, this is how the RA would prefer you to submit this bill:




This also makes it so we already have a notecard handy in world to deposit in a Dispensor in the Rathhaus, similiar to the one holding the deeds of the City, where all people can examine it.

If you can't get in world before the next RA meeting this weekend, I'll be happy to cut and paste the information into a notecard for you. If you want to just post it on the forums. And I'm adding this item to our next agenda as we speak.

Might I assume that these Bonds will also be for sale to foreign investors?

I'm all for retrofitting the old bonds that seemed to have no real policy. I see no reason to issue new city bonds at the moment, but I agree the bill should address foreign investors.

Absolutely. We're not issuing new bonds right now but in the future anyone can purchase them.

~Ulrika~

I'll transfer this to a notecard before the next meeting.


Summary

This bill seeks to define the nature of the Neualtenburg Bond, to ensure its worth, return on investment, and cost to the city. If accepted, the changes would be retroactive for existing bonds. Changes include a fixed duration and return, well-defined methods for converting investments to land-use fees, and guarantees in the event of dissolution.


Neualtenburg Bonds

1. par value - I recommend a factor of 1.12 times the purchase price (the nominal) as the par value. Thus if someone purchased US$100 in N-bonds, the par value would be US$112.
   
2. maturity date - The original city bond sales took place on about the 1 Apr 2005, with the first sale on about the 1 Jun 2005. In the future, bonds should mature at six months from the date of issue. In the case of the original bonds, I recommend setting the maturity date at six months from the date of the first land sale. Thus the first bonds would mature on 1 Dec 2005 and all other bonds six months after issue.
   
3. rate type - Bonds should return at a fixed (as opposed to variable) rate.
   
4. coupon dates - Coupon dates should be monthly and coincide with land-use fee due dates such that citizens can use their coupon to pay for land-use fees, otherwise coupons are paid to them in US$ or held in a separate account (by the city bank).
   
5. callability - Bonds will not be callable (meaning the city can not opt to pay them back early).
   
6. puttability - Bonds can not be put in the traditional sense, where a bond holder can demand early repayment from the city. Instead, there will be monthly bond put dates, where a bond holder can have up to their monthly land-use fees (minus the coupon) deducted from the issue price. This will decrease the size of the next coupon and the par value of course.
   
7. convertibility - When bonds are mature they can be transferred to other city securities (currently we have no other securities.
   
8. dissolution - In the event the cooperative ceases to exist, bond holders will be given proportional shares of government-owned land from the sim or sims that the bonds were issued to support.

Example

Ulrika buys US$300 worth of N-bonds. The par value would be US$336 with a term of six months. Coupon dates are every month, so there will be six monthly coupons of US$6. At the end of six months, Ulrika will be paid US$300.

Ulrika decides that she wants to pay for her US$30 land-use fees using her N-bond. After the first month, she receives a US$6 coupon and deducts the maximum allowed US$24 from her bond to cover the fee. Her new nominal, par value, and coupon after the partial call would be US$276, US$303.60, and US$5.52.


Calculations

Par value, P, is equal to the nominal, N, times a factor:

The factor, f, is equal to a monthly return times the number of months left until maturity, n:

The coupon, C, is equal to the the par value minus the nominal divided by the number of months left until maturity:


~Ulrika~

I'm not very familiar with bonds; they don't come up in the normal course of running a business, which is really all that I'm familiar with in RL. But I've pored over this documentation, and I think I understand the structure; how the bond would work.

It seems to me that the proposal is fine. Rather complex; I always avoid an arrangement that I don't fully understand, and if other members of the SL community took that advice we may have few takers. But, on the face of it, it seems reasonable.

Two comments, one probably minor, and one I suspect quite major.

One) The rate of return you propose: 12% uncompounded over six months, which equals 24%, uncompounded, over one year, seems very high. Is that what money costs in SL? Particularly if that money is in a dollar account? I defer to those more familiar with the lending environment in SL, but it seems *very* high to me. Traditionally, bonds are considered a very conservative form of investment. Because of that, one accepts a lower rate of return. I'm just asking if that amount is what we should offer.

Two) And this is a more serious problem. In a nutshell, we can't apply this bond program to the existing bonds because, at maturity, the City will not be in a position to repay them. That means that either (1) the existing "bond holders" would be forced to roll-over their funds to a new term, or (2) the City would have to scramble to sell new bonds in order to finance its obligations to the old ones.

This is fundamentally unsound. The whole idea of any debt obligation is that the recipient of the debt demonstrate its underlying ability to make good on its obligations. If its obligation is to repay the principal of the bond (plus, I assume, the unpaid coupon value, or interest in the normal sense), then it has to demonstrate to the purchaser that it will be able to do that. Neualtenburg will not be able to repay its debt to existing lenders on December 1.

For those who have no idea why I say such a thing, and who are interested, let me try to simply explain, with a look at the Balance Sheet on the website, dated August 31, 2005.

http://www.tospitimou.com/Neualtenburg/BalanceSheet.pdf

First, at the top, Current Assets, which for Neualtenburg is cash. The total of the five accounts is L$112,165, which, if all converted to US$, at 300L$/US$, equals about US$375.00. Probably a bit more, since much of the money is already in US$.

So, we have (at least on August 31) US$375.

Next, the balances on the Loan Accounts, which are proposed for conversion to bonds. Looking lower down, you find the Liabilities accounts, which are those amounts that we "owe". In that section, a list of "Bonds Outstanding". The relevant accounts are:

Bonds Account 21212 US$$ 65436
Bonds Account 21234 US$$ 101085
Bonds Account 21256 US$$ 77043

Although the are listed on the Balance Sheet with their L$ values (you have to use one currency to "balance" a Balance Sheet) you can see by the labels that in fact these are US$$ accounts. That is the currency in which the lenders had originally provided the funds, so all calculations are done on those accounts in US$.

The US$ amounts in those accounts are:

Bonds Account 21212 US$$ 236.88
Bonds Account 21234 US$$ 365.93
Bonds Account 21256 US$$ 278.90

for a total of: US$ 881.71

6% annual interest has been compounded on those accounts since the funds were loaned. This proposal would remove that interest, which is no problem. The total interest paid on those accounts has been US$ 20.85, so the total of the accounts is US$902.56.

I should add that this balance is in fact after these loaned funds have been used by the individuals involved to purchase land and pay their monthly fees. Those expenditures have lowered the amounts of the bonds/loans; lowered them to the amounts shown here.

So.... we have $375 in the bank. We have obligations of $902.56 which, it is proposed, come due on December 1. Since that situation forces one of the two scenarios I mention above, I feel it is untenable.

Consider New York City, which is perpetually in debt, and constantly issuing bonds. Even New York City has confronted a series of crises when it found itself unable to meet its debt obligations; hence the constant talk of "bail-out" and the now famous line from the 1970's: (President) "Ford To City: Drop Dead". Bond debt is an actually real obligation; like paying the Lindens every month is a real obligation. New York faced bankruptcy in those situations; Neualtenburg can not afford to do that.

Bottom line. I feel that issuing bonds can be a great idea for Neualtenburg, although this seems rather complex. But, we cannot issue bonds until we can demonstrate how they will be repaid at maturity. When we can do that, the bonds will have great value, and it will undoubtedly be a great way to raise money inexpensively.


Sudane

The rate isn't compounded. It's a flat 12% return over six months, so it would be an uncompounded return (coupon) of 2% per month. Coupons are not rolled back into the bond like an investment is.

If a flat, uncompounded rate of 2% per month (12% over 6 months) is too high, we can certainly decrease it. Given the risk of this investment, it seemed like a reasonable return to me. Note that bonds can be very high risk with high rates of return (think junk bonds).

This is correct. When the bonds expire, we will not have the money to repay them. Thus we'll have to issue a second set of bonds before that to cover the first. This is standard practice with bonds and nothing to be concerned about. Personally, I think it's a great investment and will keep buying bonds until my land-use fees drop their value to zero. I also have a hunch that many of our new residents would jump in with smaller bond purchases to easily cover the debt if you or Catfart did not want to buy a second set of bonds. If they didn't, I would.

I just wanted to leave this quote here to show what a pain in the tush accounting in L$ is. We have to convert every value, state the exchange rate, explain how things are still pegged to the US$, and then give the values in US$. Why not just do it in US$? It's so funny.

Excellent! We are only US$525 or so short now! That's half the size of the previous bond offering. The second one will be Nburg's last.

If this doesn't convince folks, I'll break out my exponential versus logistic investment talk and graph in the next post. Believe me, bonds with limited terms are what we want. What we don't want is a city with a big surplus while investors don't know when or how to get their money back.

~Ulrika~

Hi folks,

I'm new here, so be kind if I get things wrong . I'm not quite sure, even from reading the transcript of the RA meeting if this bill had passed, but I'd like to comment anyway. This bill seems to be to be about 2 different things:

1.) The retrofitting of an old loan into the proposed bonds.
2.) Some sort of policy for how the city will go about borrowing money in the future.

Regarding 1.) The retrofitting of an old loan into the proposed bonds:

What were the terms of the old loan, and will the city pay more or less than what would have been paid if we did not retrofit the bond structure to the old loan? Also, who were the providers of the loan?

From what I can find in the forums, it seems like the loan is for 6% annual interest rate (compounded monthly), with no deadline for repayment of the loan?

If this is the case, arent the old terms much better than the proposed bond?

Regarding 2.) Some sort of policy for how the city will go about borrowing money in the future.

It seems like if this is the purpose of the bill, it is not necessary to specify what the par value of the bonds are, or its maturity date, etc. Seems to me to be issues that need to be threshed out the next time the city wants to take out a loan.

Has anyone thought about setting the interest rate (par value) at auction, with the city having the option to turn down bids? This will give us a better sense of the market value of nburg bonds rather than setting an arbitrary price 1.12.

Some sort of policy might be useful, e.g. to resolve that all future debt incurred by the city will be in the form of US$ denominated fixed rate bonds.

Speaking of US$ denominated, I have some reservations about this. It is true that the vast majority of the city's expenses are in USD, however, from an investor's perspective, US$ denominated bonds raises a lot of thorny issues, not the least of which are the tax implications.

If I invested in bonds issued by the city, I probably will have to consider that RL income. I think the current tax rate in the US for interest is around 30% (not an accountant, dont quote me on that). Offering US$ bonds might also require nburg to withold tax, and report to the IRS... again, I am not an accountant, but I think the tax implications of issuing USD bonds should be considered carefully.

If we were to use paypal to transfer funds, we might also want to consider the cost of paypal fees. L$ denominated bonds will have none of these problems. There is no charge for transferring L$, and we can argue that L$ income is not RL income to the tax man. For me as an investor, I would buy nburg bonds if it were L$ denominated, but not if it were in USD. Now, I think a lot of people are like that, and I thinkwe might be shutting the door on a large pool of potential lenders if we only issued USD bonds.

In conclusion, I'd like to recommend that this bill be split into 2. One to say that the old loans be converted into a new bond structure. The other to give guidelines on how the city should go about borrowing money in the future.

Hope this contributes to the discussion.

Ah, another financial mind! Well, my brain does not work in financial ways, but I have been thinking about the bonds lately and I'm glad you raised this issue again.

If someone could distill the bond offerings into simple terms, I might very well be an investor. What I don't understand is how the city is raising the cash to pay back the bonds. I know I'm simple, but where is the money coming from?

shhhhhhhhh. You'll give away the Ponzi scheme.

These are all great questions.

There were three individuals who put up the capital to purchase the sim. Due to privacy issues, I can only say that I was one of the lenders. The cost of the sim was split approximately three ways.

The current system was implemented by Sudane on the fly without a vote. It's an ad-hoc system put in place until we could agree on a formalized version. If the retroactive version of the bill fails to pass, we'll still have to go back and vote on the term and interest rate of the compounded version, as it has never been discussed. Currently, we're using a 6% APR compounded monthly with no deadline for repayment.

I've attached a graph that shows the cost of the loans for a flat bond issue and a compounded return on investment. In the short term, the bonds are more expensive but after a few years will outstrip the cost of the bonds. Given long enough the exponential growth of the compounded account will eventually outstrip the city's income. Additionally, the low rate of return in the short term does not adequately reflect the risk associated with the loan. It's currently set at a value used for safe-as-houses savings accounts, not risky virtual-world ventures. So assuming our future loans are bonds and focusing only on the existing loans, we need to:

1. Decide if we want to convert to traditional debentures (bonds) or keep the loans that grows like savings accounts. Cities in the real world use bonds, of which I am in favor.
   
2. We need to decide as a group what a fair rate of return is for a 6 to 9 month loan. When we started this venture we weren't sure we'd succeed, so to reflect that risk, I recommend a par value on a bond that's between 8% and 12% with a term of 6 months. If we stick with a savings-account method, we should scale the APR to match this rate of return at the 6 month mark, which would be an APR of 23%. (I can show the math behind this if necessary.)
   
3. We should decide upon a reasonable term, especially if we stick with the savings-account method. It looks like the time we need to break even is between 9 and 12 months. I favor a six-month cycle myself. A fixed term is especially important with the savings-account method as the debt will grow without bounds otherwise.
   

Insightful!

This is my error. The bill is not attempting to set the par value on future bonds, rather those values referred to updating the current debts. In the future it makes great sense to have a sliding par value (and maturity date). If we are having trouble raising enough money, we simply increase the par value until we have enough lenders.

There are two issues here. First, if one realizes capital gains, it is their responsibility to declare that as a source of income on their tax returns. (Given that I stand to make at most US$36 if we convert to bonds or US$13 if we use the savings account method, I won't even bother.)

Profits made by our group will not have to be reported, provided that revenue is kept as a group asset and not dispersed, as we will soon be an official nonprofit corporation. More on that later.

There are a few reasons why the initial bonds must remain in US$. Primarily, it is because our investments were made in US$. If we peg the bonds to the L$ it injects the instability of the currency market (which is substantial) into the return of the bonds. For example, the exchange rate has dropped by 25% over the past 9 months, meaning that even with a 12% bond return (par value of 1.12 times the nominal) all the investors would have lost 13% on their investment. In my case, I invested US$300 (or so) and I'd like to see at least that much come back.

However, I am in favor of issuing bonds in L$, if we need to raise capital for in-world construction projects, where we'll be paying groups in L$. The key is to keep the instability of the money market from affecting the quality of the bond.

I said the very same thing in a previous post in another thread just yesterday.

Great input. Consider yourself recruited to look over the next submission of the bond bill which should be coming along shortly.

~Ulrika~

Right now three lenders (I was one) put up the money for the first sim. As we sell land and collect land-use fees, eventually the city will have enough money to pay us back. Most of the discussion surrounding this debt is if we should convert this current debt to bonds or leave it as a savings account and if we do convert it to bonds, what should the features of the bond be? So at least in the near term, we won't be selling any bonds.

The next time we sell bonds, will be when the current bonds (if we make them bonds) reach maturity (are paid off) and we need money to cover that debt (about US$400) or when we buy our second sim (about US$1250).

Questions we need answered are, how much return should an investor receive on a six-month loan? Imagine you gave US$300 to the city. How much would you like to see back after six months? Remember, if the city fails financially, you would lose your entire investment.

~Ulrika~

Hm, then wouldn't your drafting of a bill that will determine the interest rate be a conflict of interest?



I'm quite surprised by this. You loaned out money without first determining how much you are to be paid back? It looks like, effectively, there were no terms for the original loan. This is very frustrating! Determining a fair interest rate post-hoc is really unheard of. Given that the lenders did not extend the loan with any terms whatsoever, seems to me that having the treasurer determine the terms for them is not unreasonable.




Again, this is quite difficult for me to wrap my head around... how are we going to determine what is reasonable now that the loan has been extended (and it seems partially paid). I mean, if the terms were given before the loan was agreed upon, then the terms were reasonable just by the fact that the two parties (the city and the lenders) agreed to the terms. That is, both parites considered the loan acceptable at the time.

Now... it is quite difficult. If the city were still struggling with making ends meet, would you consider lowering the interest rate? If the city were somehow raking in much more money than currently, would you ask for a higher interest rate?

I think, as a general principle, the city should negotiate for as low an interest rate as it can get.




This seems reasonable.



Speaking as someone who wants to park his L$ in investmenst outside of ginko, I'd really like to see nburg issue L$ bonds in the near future.



Looks like I've been conscripted .

A conflict of interest is a situation in which someone in a position of trust has competing professional or personal interests. In this case my interests are aligned with that of the city, as the city has great need of a well-defined debenture and I would like to see my money returned some day. Were I voting on the rate of return, I would otherwise agree. Instead, I'm encouraging others to discuss and determine the rate of return both in the forums and in the RA.

There might or might not be a conflict of interest in the RA when it comes to voting on the par-to-nominal ratio. I will make sure in the next version of the bill that a statement asking those who might be investors to abstain from the discussion and vote. (Great catch Flyingroc.)

I've been concerned about the loans from the beginning, however we haven't had time to address it until recently. In the beginning, we were a tiny group of visionaries putting our assets and time on the line for a project that had never been attempted before in SL. We're just now coming around to fix a lot of things like the official city currency (US$) and the nature of our debentures now that we're breaking even. The goal is to address the issues now, such that when we expand, we won't have the same problems.

Also, the treasurer does not have the authority to determine the terms or nature of the debenture. All decisions regarding finances are voted on by the RA and ratified (by lack of a veto) by the Guild -- it's all the Constitution allows. This is an important distinction between Neualtenburg and a larger republic like the U.S. -- we have no departments (education, transportation, treasury, etc.) with authority. Individuals or groups with special titles are simply members of the Guild functioning in specialized roles.

This is up to the RA. Personally, I think they'll have to put themselves in the shoes of the initial investors staring at a project with four remaining members wondering if they can sell land in a sim with a virtual government. I did so and I came up with a bond that has a call value that is 1.12 times the size of the nominal. Personally, I'll be happy with any multiplier greater than or equal to one.

But you're right to say it's quite difficult. Because the city is doing so well right now, it will be difficult to convince the members of the RA that there was a time when we weren't sure this would fly and wondered as we paid our US$300 share if we'd ever see it again.

In the future, this would be the right thing to do. I was wondering if you had any ideas on how one could determine what the appropriate rate of return to offer would be. I was thinking that there could be a thread that offered, say US$1200 in bonds for sale with a par-to-nominal ratio of 1.025. Individuals who were interested would purchase bonds by replying to the thread. If after a few days, all the bonds weren't sold, we'd post a ratio of 1.050, repeating this until all the bonds were sold. Everyone who bought a bond would then receive the highest ratio posted.

I'm just trying to think of methods we could implement easily using our existing infrastructure.

I agree. I've personally been quite suspicious of Ginko as they offer exponential asset growth (compounded interest) with a business model based on linear (if they're lucky) growth. Our debentures have a constant expense which is easily covered by our constant revenue stream (provided we're profitable).

~Ulrika~

Indeed. Right now, Neualtenburg is still largely operating as "frontier country", in a manner of speaking...



A consideration. On the other hand, FR raises a good point - you do not ever really want to retroactively change loans like that.

I could see proposing to offer bonds equal to the current value of the loans to the current debt-holders, since this would both serve to convert the debt to the new "standard" system, convert the interest to the more conservative rate, and put off having to pay the bulk of them for a few more months (since, we may be at breakeven, but we still don't have money saved up).

The disadvantages would seem to be that the full repayment would possibly be delayed from "earliest possible moment" to "when the bonds are called", and those who made the loans would have to reveal themselves. Given the principle that the city's finances should be transparent, this bothers me not at all, but I'm not the one who'd have to show myself.