Effective Interest Rates

[bendix]

A question for some of our more financially savvy members:

I'm looking at a 9% term deposit investment (in New Zealand). In the material it says the interest is calculated daily but can only be paid out at maturity (in this case, it's a one year term deposit).

Now, if I invest here, at the end of the year would I get just 9% return or - if its compounded daily - would I get the effective interest rate of closer to 9.4%

To help explain further, I currently have money in a 30 day term deposit, where the interest of 8.3% is paid at the end of the 30 day term. Now, when that interest is paid, the principal compounds and after a year the EFFECTIVE interest rate is closer to 8.6% . . . .

Thoughts?

[LaoPo]

A question for some of our more financially savvy members:

I'm looking at a 9% term deposit investment (in New Zealand). In the material it says the interest is calculated daily but can only be paid out at maturity (in this case, it's a one year term deposit).

Now, if I invest here, at the end of the year would I get just 9% return or - if its compounded daily - would I get the effective interest rate of closer to 9.4%

To help explain further, I currently have money in a 30 day term deposit, where the interest of 8.3% is paid at the end of the 30 day term. Now, when that interest is paid, the principal compounds and after a year the EFFECTIVE interest rate is closer to 8.6% . . . .

Thoughts?

Have you considered the risk of devaluation ? The NZ dollar is like a bungy jump lately.....quite risky if you ask me...:

Have a look here, latest news articles about the NZ $:

http://search.bloomberg.com/search?q=New+Z...te%3AD%3AS%3Ad1

High yielding %'s are always risky....

LaoPo

[bendix]

Sure I have. I dont think you could call it a bungy jump ride lately - against the baht it's been pretty steady in that 24-26 baht range for a year or so. Other more stable currencies have been much more volatile ..

Put it like this; I'd rather chase 8-9% in NZ than 2-3% in the US or 1% in Singapore and Hong Kong.

Anyway, I've got a NZ passport. If the worst comes to the worst, I'll keep it there and spend it there :-)

[sweetchariot]

Normally with these kind of term deposit the interest is compounded daily so that the end result is the headline rate - ie. 9%.

I say normally, without seeing the small print I couldn't guarantee this was the case.

[LaoPo]

Sure I have. I dont think you could call it a bungy jump ride lately - against the baht it's been pretty steady in that 24-26 baht range for a year or so. Other more stable currencies have been much more volatile ..

Put it like this; I'd rather chase 8-9% in NZ than 2-3% in the US or 1% in Singapore and Hong Kong.

Anyway, I've got a NZ passport. If the worst comes to the worst, I'll keep it there and spend it there :-)

OK, I see; In your situation it's fair enough.

LaoPo

[bendix]

Normally with these kind of term deposit the interest is compounded daily so that the end result is the headline rate - ie. 9%.

I say normally, without seeing the small print I couldn't guarantee this was the case.

You see, I'm not sure that's the case.

A case in point. With the same bank (BNZ) I have a 30 day term deposit investment with a 'headline' rate of 8.3%. I did my calculatlons. I multiplied the principal by 8.3%, then divided by 365 to give a daily yield, and then multiplied that by 30. The amount of monthly interest I earned was exactly in accordance with the amount on my investment statement.

NOW. . . . and here's the rub. That 8.3% interest earned for the thirty days is added to the principal, and THAT is then reinvested at 8.3% so the principal keeps increasing monthly.

If you have $100,000 invested this way, you would expect to earn $8300 interest after a year. In fact, because of compounding monthly, the actual yield is closer to $8600 so the effective rate is 8.6% (ish).

[Edonista]

A question for some of our more financially savvy members:

I'm looking at a 9% term deposit investment (in New Zealand). In the material it says the interest is calculated daily but can only be paid out at maturity (in this case, it's a one year term deposit).

If it is paid out at maturity it cannot generate compound interest daily. When in doubt, always think which option favours for the bank

Anyway consider Turkish lira is paying 16% and Brazil 10,25% 2028 bond quotes just 88 , for a yield to maturity above 12%.

[bendix]

Not sure if you're being ironic or not Edonista, so I'll give you the benefit of the doubt . .... . . Does anyone seriously invest in these smaller currency bonds? I'm not against it in principle.

[naka]

A question for some of our more financially savvy members:

I'm looking at a 9% term deposit investment (in New Zealand). In the material it says the interest is calculated daily but can only be paid out at maturity (in this case, it's a one year term deposit).

Now, if I invest here, at the end of the year would I get just 9% return or - if its compounded daily - would I get the effective interest rate of closer to 9.4%

To help explain further, I currently have money in a 30 day term deposit, where the interest of 8.3% is paid at the end of the 30 day term. Now, when that interest is paid, the principal compounds and after a year the EFFECTIVE interest rate is closer to 8.6% . . . .

Thoughts?

Bendix, Something you should consider is your cost of getting into the NZ dollar and then the cost

of getting back out of the NZ dollar, assuming you do not have assets in this currency to start with.

Some countries have horrible IN/OUT exchange rates. (Thailand is superb in that particular respect)

As a starting point I would call your chosen bank and ask them "What's your buy and sell rate viz the US dollar (or whatever)

right now".

If the buy/sell differential is large then it could easily wipe out a whole years worth of (anticipated extra) interest.

Just as an indicator, here is today's Bank of NZ buy/sell spread for the US Dollar for TT transfer ... Ouch !

0.7859 - 0.7676 That 9% just turned into 3% after a one year term (not so bad for longer terms).

Naka.

Edited May 4, 2008 by naka

[BEENTHEREDONETHAT]

Bendix go into http://www.google.co.th/search?hl=en&q...earch&meta= and it will give you all of the new zealand interest rates. It also has a blog with interesting comments.

I have had $ in NZ since 2001 and have been very happy with the results. When we xfer funds to Thailand we call the bank ANZ and usually have the money within a few hours. We always do the conversion to Baht at this end.

In order to open a bank account in NZ it requires a trip there to establish it. The NZ dollar has been over a wide range in the last few years, right now it is pretty high .78 to US$ it has been down to the .45 to US$ in the past. http://www.gocurrency.com/v2/historic-exch...amp;frYear=2007

[PeaceBlondie]

Compounding daily means exactly that. 100,000 at 9% a year, compounded daily, is 109,416.21. The daily interest rate is 9%/365, or 0.0246575% every day for 365 days. It is not the daily rate times 30 to get the monthly rate, because that would not be compounding.

Easy to calculate on any Excel spreadsheet.

///However, each country's truth in lending laws may use whatever computations the legislature chooses.