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Know The Financial Benefit Of Selling Precatorios To An Investor

Know The Financial Benefit Of Selling Precatorios To An Investor

Taking any financial decision is a big deal. Be it investment or borrowing, one has to consider numerous factors before landing on one decision. It becomes even more critical when it involves precarious.

For a non-professional, it is nothing more than a financial instrument. However, it is not like the ordinary ones. It is a judicial order issued by the local courts against the government institutions to pay off the damages, contractual differences, and other monetary dues payable by the authorities like state government, Union, Municipality, and foundation.

Due to the fiscal crisis, the government failed to pay off the precatorio dues. That’s where the market for investors emerged. Simultaneously, the government came up with new bills to streamline the issues which made the precatorio market more systematic. As a result, various investment companies started with the purchase of state precatorios and other precatorios from the holders at a price that may be lesser than the actual due.

People often have the dilemma of whether to sell their instrument to the investor or to hold for the government authority to pay it off as the investor usually pays less than the actual price of it. To make a clear understanding and wipe out your confusion, here are the two key benefits from the financial aspect that every individual should consider before landing on any decision.

Time Value of Money

It may happen that you get less when you sell your precatorios to an investment company. However, if you analyze it properly, you will find that you are in a win-win situation despite selling it at a lesser price.

To understand it well, let us go through the concept of the time value of money. It says that a penny today is better than a penny tomorrow not only for the reason of the uncertainty of the payment but also for its value being discounted in the future. Let us take an example to understand it properly.

You have the precatorios worth R$100 that you can encash only after 5 years. The investment company is ready to pay you R$ 90 for your precatorios at present. Now, if we don’t sell it and wait for 5 years, you will have to consider the discount rate that reduces the cost of money.

Assume, the discount rate of 10% i.e. the present value of money after 5 years at a 10% rate is 0.62092 (refer to the present value chart). Hence, the value of R$100 after 5 years is 62.092(R$ 100* 0.62092) which clearly depicts that R$ 90 today is not a loss but a profit.

In short, selling the precatorios at a discounted rate today is a profit considering the time value of money.

Investment Opportunity

We all know that money has an earning capacity. When you don’t have it on hand, you lose the chance to earn it. Following the earlier example, when you sell your precatorios for R$90, at a 10 % return rate, you can earn R$ 9 a year which means at the end of 5th year, you will be able to yield R$ 45 (R$9 *5) out of it.

The above example clearly shows that even if you sell it at a discounted price, you are on the profit side as you can take the advantage of investing it into some profitable venture that would yield you more than the actual value of precatorios.

With this means, we understood the major two financial benefits of selling the precatorios to the investors. For a layman, knowing these factors are quite essential so that they can comprehend whether they are making a profit or loss by selling it. For more details, you can visit, one of the leading investment companies dealing in precatorios.