Sunday, January 16, 2011

4 year SGD Interest Rate Linked Structure Deposit

My wife showed me a brochure of the above structured deposit from a local bank. It comprised of 9 pages of detail. I told her not to invest in any complicated structured product, as she may not be aware of a catch.

The structured deposit offers an interest rate of 1.2%, 1.3%, 1.4% and 1.5% during the 4 years respectively. It gives the bank the option to call back the deposit at any half year period. The investor stands the risk of being locked up with the low yield if interest rate increases and the risk of being redeemed if interest rate drops further. There is no way that the investor can estimate the chance of either event. This structured deposit is not covered by the Government guaranty on deposits. There is a risk of total loss, in the event of failure of the bank. While this is small, the paltry yield does not merit it.

It is better for the investor to buy a government bond which will probably give the same yield with lower risk. It is a neater arrangement.

I hope that our banks and corporations will issue a straight forward corporate bond with a yield that is higher than government bond, and avoid all the complicated structures and options.

Tan Kin Lian
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3 comments:

Anonymous said...

It is in the bank interest to come out with complicated structures which are meant to mislead the public into thinking they are getting a good deal, while at the same time maximizing profit for the bank. The harder it is to quantify the benefits, the easier it is for the bank to sell it, as well as earn from it.

I think professionals working in banks have a strong interest to keep coming out with such complicated products, to justify their high pay.

January 16, 2011 9:28 PM
Jamesneo said...

These low interests products allow the bank to leverage more and also in a way help to cover the corporate bonds that they occasionally issues to more savvy investors which are normally overwhelmingly bought. This is in my opinion almost a fraud.

January 16, 2011 11:44 PM
Anonymous said...

Also the bank never tells u what are the conditions that they will pay the higher interests. Why buy from the bank. The investor is the one that will lose money.

November 04, 2011 4:28 PM

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