Youth Bonds are designed to enable a partnership, a walking with the young people so funded. The basic idea is as follows:
1) A municipality issues the bonds (via a local bank) in order to raise capital to finance the initiative of young people, so that they become entrepreneurs, not dependants.
2) Bought and held by institutional, governmental and private investors, the bonds are tradable.
3) The interest is met out of ‘misplaced youth’ budgets, money that would otherwise be spent on drug addiction, criminality, re-education and other aspects of misplaced youth.
4) The bond market prices the Youth Bonds on the basis of risk and term structures that reflect (a) the use the funds will be put to and (b) the importance the market gives, and therefore the value it accords, to funding young people in this way.
5) The money is used to fund the initiatives of young people on the following basis:
i) the money is advanced in the context of a specific financial plan (see Financial Literacy) which is used by lender and borrower-entrepreneur alike to navigate the project to fulfilment. The financial plan identifies the amount and term of the capital needed by the borrower-entrepreneur;
ii) because the interest on the bond is met out of the ‘misplaced youth’ budget, there is no interest charged to the borrower-entrepreneurs. They are, however, required to refund the principal at the agreed term, so that other young people may use the money, and so that the bond can be repaid (in the event that it cannot be rolled on or replaced at term).
6) The fact that no interest is charged to the young borrower-entrepreneurs is intended to do two things:
i) provide a psychological fillip because it expresses confidence in the borrower-
ii) maximise the borrower-entrepreneur’s pathway to profitability.
7) As well as acting as a navigation instrument, the purpose of the financial plan is to provide collateral based on shared awareness of a project’s circumstances (instead of the usual ‘blind’ risk-reward considerations when lending at a remove).
8) The financial plan has three components: Income and Expenditure Accounts, Balance Sheet, and the Cashflow Monitor. All are tracked in terms of budget, actual, variance and explanatory narrative, reviewable at least quarterly, but preferably monthly. This means:
i) the project is accounted for on a detailed basis, using standard accounting software;
ii) the borrower-entrepreneur is financially literate (see Financial Literacy), meaning able to keep accurate, up-to-date accounts and to create and work within a financial plan.
Originating Blog: Victor’s Blog