(2 of 2)
Celebrities who issue bonds are essentially borrowing money and paying it back through future royalties. So the loan--the up-front money--is free of income tax and in fact can generate a tax deduction: forfeiting royalties is partly an interest expense, deductible if the loan is used for investment. Once the bonds mature, the celebs retain ownership of the property that generated the royalties. If the royalties are greater than expected, the bonds get retired early. So the celebrities get all the upside.
The investor bears the risk if royalties come in lower than expected, as well as the considerable risk of a bond that does not trade actively and should be held until maturity. But for that the investor gets an interest rate 1 to 2 percentage points higher than comparable (single-A) corporate bonds. The rate on the deals so far has been 7% to 8%. For now, such bonds are suitable only for insurance and pension-fund managers. But, says Pullman, "we're working out the kinks." Their star power could make for a popular bond mutual fund. Now that's entertainment.