# Inflation-linked Deposit Account



## andycole (5 Jul 2011)

This product has been designed by Eddie Hobbs.

"_The inflation rate used will be the EU rate produced by Eurostat, which is currently 2.7pc.

If inflation continues at 2.7pc a year, then those who invest in the bond will get a return of 5.4pc a year over the five-year term.

If inflation falls below 0pc, then investors will get all their capital back._"

Irish Independent Link - http://www.independent.ie/business/...eposit-account-designed-by-hobbs-2812776.html


----------



## Lightning (5 Jul 2011)

Interesting, most "bonds" have an equity element which excludes them from been listed as a 'pure deposit' product. If the Indo is right, then this is a pure deposit product. 

There is no information on the BoI website yet. I will wait for full information before adding it to the best buys.

This product currently pays more than the NTMA 5 year 6 months product.


----------



## Marc (5 Jul 2011)

One of the main drawbacks with structured products like this is that it is guaranteed but who is providing that guarantee? In this case it is Bank of Ireland or more precisely effectively YOU and ME as taxpayers. You are providing your own guarantee here. Interesting concept.

Your counter party to the contract is Bank of Ireland so you have a promise of your money back based on a BBB+ credit rating (that attaching to the Irish State) so what return does the Market require to take on that risk?

Well if I look at Irish government bonds maturing in 2016 with a coupon of 4.6% the current price on the Irish Stock Exchange is €72.94 so I get a yield to maturity of around 12%pa (interest payments plus capital gain) from buying this bond. Don't forget that capital gains on Irish government securities are also tax free for individuals although interest is taxable at marginal rates making this calculation slightly more complex for non pension investors.


So if I put €56.74 into this bond in 5 years I would have €100 back as an absolute minimum provided Ireland doesn't default on it's debts. That leaves me €43.26 in every €100 to invest in a portfolio of investments to attempt to obtain a return of twice the average rate of inflation over the next 5 years. No lock in for 5 years I am free to buy and sell as I see fit.

This is how someone could think about how they might construct a DIY version of this product without taking on anymore default risk than using BOI as a counter party to the contract.

For the avoidance of doubt I am NOT recommending anyone goes and puts half their capital in an Irish Bond expecting to get all their capital repaid in 2016 without some risk of a restructuring of either interest payments capital or both.

But the point is that anyone with a calculator and access to the Irish Stock Exchange can work out what the Market sees as the expectation of a "fair" interest rate for Ireland's credit worthiness and over this term the market says I want 12%pa for my money.

Now have another look at this contract.


----------



## Marc (5 Jul 2011)

“They [structured products] are horrible investments for retail investors…Simple portfolios of bonds, stocks will beat structured products 99.5 percent of the time because of the heavy profit built into the pricing”
- *Craig McCann, former SEC economist and founder of Securities Litigation & Consulting Group


At first glance, structured products may look enticing; after all, they offer you some upside and protection on the downside. What could be so bad about that?

Perhaps the very first principle of investing is that there is no such thing as return without risk. No free lunches risk can never be obliterated; it can only be transferred from one party to another. If your broker is offering you a product that promises partial upside of the market with downside protection, you can be absolutely sure that the party that has agreed to take on the downside risk on your behalf is being paid to bear that risk, so the question you should naturally ask is, “Who is paying this party to take on my risk?” The answer, of course, lies in the mirror, but the true costs are not transparent. The cost may show up at the end as a much lower return than would have been received in a boring index fund.

One of the key points to understand about structured products is that they are constructed out of positions in the Market and the issuer of the structured product, after collecting your payment, will buy these building blocks at a lower price and pocket the difference as immediate profit, after paying your broker his commission.

Structured products carry default risk of the issuing company. Buyers of Lehman Principal Protected Notes have had to swallow this bitter pill. So even though structured products may appear to provide market-based returns, investors in these products are actually staking their nest egg on the fortunes of just one company. This is always a bad idea!

An additional problem with structured products is liquidity. The hapless investor who needs to sell one before maturity should expect a bad investment experience.


----------



## NUNRG (6 Jul 2011)

This looks basically like a 5 yr deposit with no access and a return at inflation X 2, less DIRT + 3%. Most of us try to beat inflation but to do so requires taking positions in shares or commodities. Even inflation-linked Govt bonds only pay inflation. This guarantees it twice over. The "price" is an illiquid asset for five years. 

The credit risk is just about common to anything covered by the Eligible Liabilties Govt guarantee which is, effectively ECB backed.

All told its pretty straight forward and clean.


----------



## Sunny (6 Jul 2011)

First post I see! Anyone got the brochure on this? I don't know the details but can guarantee you that the 'price' is not simply that you are holding an illiquid product.


----------

