Author Topic: Using high interest bank deposits rather than bonds  (Read 2382 times)

alwaysonit

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Using high interest bank deposits rather than bonds
« on: August 19, 2014, 06:39:25 PM »
Has anybody ever considered this as an alternative?
I can earn over 5% per annum on NZD in the biggest bank in New Zealand.

dragoncar

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Re: Using high interest bank deposits rather than bonds
« Reply #1 on: August 19, 2014, 11:27:22 PM »
Depends what you are using the bonds for.  Your bank deposit won't increase in value if rates drop.

alwaysonit

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Re: Using high interest bank deposits rather than bonds
« Reply #2 on: August 20, 2014, 04:19:43 PM »
Using bonds for long term saving and for diversification against equities, which I have yet to buy.
It will be a fixed term deposit so my rate will be locked in for the full term.

aj_yooper

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Re: Using high interest bank deposits rather than bonds
« Reply #3 on: August 20, 2014, 04:31:40 PM »
Assuming your inflation rate is not too high (?), it sounds pretty good.  What is the term?

alwaysonit

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Re: Using high interest bank deposits rather than bonds
« Reply #4 on: August 20, 2014, 05:19:04 PM »
4.3% for 1 year, 5% for 2 years, up to 5.75% for 5 years.

I can also earn 3% on the AUD with my Australian bank account.

I can get 7.9% on the USD in Mongolia and 5% on the Euro in Georgia and Azerbaijan, but I've been warned away from these countries by posters in other financial forums.

Another thing I should have mentioned is most of my wealth is in EUR. However I'm a perpetual traveller with no idea where I will retire, so not sure if this is much of an issue.

aj_yooper

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Re: Using high interest bank deposits rather than bonds
« Reply #5 on: August 20, 2014, 06:53:42 PM »
In the US we have insured CDs, meaning the principal and interest will be guaranteed, even if the issuing bank fails.  How are your funds protected?

I would only put money in countries that I had knew.

superannuationfreak

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Re: Using high interest bank deposits rather than bonds
« Reply #6 on: August 20, 2014, 09:34:24 PM »
For Australia (and presumably New Zealand) the main risk is currency value changes.  E.g. for Australia the government is stable, inflation is fairly low (target 2-3%) and bank deposits guaranteed up to $250,000AUD.

However if your 'baseline' currency that you are planning to spend (at some point) is not AUD then currency fluctuations can destroy your return advantage:
http://www.xe.com/currencycharts/?from=AUD&to=USD&view=5Y

Example from the chart: in July 2011 an AUD traded for ~1.10USD.  Three years later it's around 0.93USD.  That's around 5.4% compounded lost per year, taking a US investor below par even with a 3-5% local interest rate for that period.  So for the non-local-currency investor that return does not come without risk - if the purpose of cash and bonds is to maintain value in bad times then you won't necessarily get that (and if the purpose is higher returns then shares have higher expected returns).