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How to earn 6.30% interest after 4 years?

Monday, August 25, 2014

Someone tried to interest me in this not too long ago:


I have forgotten about it until I saw an email advertisement recently.

Any interest in this "interest"? Well, I blogged about why it did not interest me before and if you are interested, please read related post number 1 at the end of this blog post.

What I find objectionable about this advertisement is the use of the word "interest". What do we think of when a bank promises us a certain interest rate? What do we understand by the word "interest"?

Definition of "interest":
Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt.

When a bank promises an interest rate of 6.3% after 4 years to us, most people would interpret it as a fixed deposit with a total of 6.3% in interest paid after 4 years (or about 1.575% per annum). If we asked any reasonable person, that would be the view. Then, if the product is not what any reasonable person think it is, we have a problem, don't we?

Read the small print:
"Because the Structured Deposit is structured with the objective of returning your initial investment amount only at maturity, repayment of your initial investment amount does not apply if you terminate the structured product prior to maturity. You may potentially lose the principal sum invested if the investment is not held to maturity. There is no unconditional guarantee of repayment as repayment is subject to the creditworthiness of the (bank) i.e. if (bank) defaults, you may lose your initial investment amount."

This is a structured deposit, not a fixed deposit. It is an investment product and not a savings product. It is very different from what any reasonable person would have thought it was looking at the advertisement.

And the disclaimer:
"You must seek your own independent advice from a licensed or an exempt financial adviser regarding the appropriateness of investing in this product, before making a commitment to purchase this product. In the event that you choose not to seek your own independent advice from a licensed or an exempt financial adviser, you should carefully consider whether the product is suitable for you. (bank) has no fiduciary duty towards you, nor does it assume any responsibility to advise on, or make any representation as to the appropriateness, suitability or possible consequences of investing in this product."

The person who served me was quite pushy and I had to give her a piece of my mind. I was there to start a 15 months fixed deposit which promised to pay an interest of 1.25% per annum.

Now, this is not the point of this blog post but, theoretically, over 4 years, if I could get paid 5% in interest by putting my funds in a fixed deposit that pays 1.25% per annum, why would I bother taking on greater risk for another paltry 1.3% "interest"?

I don't like it when advertisements are worded in ways which could mislead and this advertisement ranks highly on the AK Dislike Scale.

Related posts:
1. Why fixed deposits over structured deposits?
2. Nobody cares more about our money than we do.

9 comments:

Money Honey said...

I always request for the fine print to read in advertisements and promotions.

Vendors are getting clever; there are multiple layers of t&c, faq attached with the promotions.

To save the trouble, l will usually give it a miss on promotions with complicated t&c.

AK71 said...

Hi Money Honey,

Yup, some offers are too complicated to understand, I agree.

Well, no one cares about our money more than we do. So, it is our responsibility to separate the good from the bad. :)

sillyinvestor said...

Hi AK,

This is the part which I find the regulators to be sleeping.

After the mini bonds saga, all structured products should have the "non-capital return guaranteed" printed in bold for all structured products.

Too aggressive?

Kill the industry? I am not sure, how stable a industry is if it is based on people gullible

AK71 said...

Hi Mike,

Sometimes, I wonder if the MAS has oversight in such matters. If they do, what would they do in such an instance? Issue a warning? Slap a fine?

This is about doing what is right. It is not a grey area.

AK71 said...

From FB:

Matthew Seah: Latest tranch of SGS bonds payig 3.75% p.a. leh... so much better than 1.539% which is so much more risky.
See:
2 years SGS.

AK71 said...

To me, unless this is a hoax, it is a sign that higher interest rates will be a matter of time. The current coupon for 2 year SGS is under 0.5%. See: Daily SGS Prices.

AK71 said...

A reader has helpfully pointed out that the "Daily SGS Prices" I have shared shows the yields and not the coupons of the bonds.

Coupon is what is initially offered by a bond. Yield depend on future market prices of the bond.

AK71 said...

Difference between newly issued and re-opened SGS, see:
What Is A Reopening Of A SGS Issue? How Are Reopened SGS Different From Newly-Issued SGS?

Tony said...

Anything too good to be true, must be false.

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