# National Solidarity Bond - is the maths wrong?



## Brendan Burgess (4 May 2010)

Is the brochure wrong? 

It says that the AER after 10 years is 4.14%

1.0414 ^ 10 = 50%. 

But the 1% is paid every year and the 40% is paid at the end of year ten. 

40% after 10 years is an annualised return of 3.42%.

So shouldn't the annualised return, be 4.42%? 

Brendan


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## Homer (4 May 2010)

Yes, the brochure is wrong.

The rate quoted ignores the fact that part of the interest is paid annually.  However, you can't just add the 1% coupon to the 3.42% return represented by the final payment.

The overall AER is 4.29% and the net AER allowing for 25% DIRT is 4.07% (not 3.96% as stated in the brochure).

Regards
Homer


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## Brendan Burgess (4 May 2010)

Thanks Homer.

Brendan


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## Towger (4 May 2010)

Homer said:


> Yes, the brochure is wrong.


 
This is from the people who run the country, are you suprised? God save us all.

Here is a link to a PDF of the brochure : http://www.statesavings.ie/Downloads/NSBBrochure.PDF


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## Brendan Burgess (4 May 2010)

Hi Towger

Actually, I am very surprised. I presume it's the NTMA who did the maths and they are regarded as doing a very good job. They have already funded our borrowings for the year ahead which seems like a great move now that our borrowing costs have risen.

Brendan


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## LDFerguson (4 May 2010)

Would it not be simpler for the consumer if the brochure stated that the AER is 1% if you cash in before 10 years and 4.14% if you leave it for the full ten?

My big gripe with this bond is that the Government have exempted it from the 1% levy on savings & investment products.  Roel Van Veggel, general manager of Rabo called this the Government using tax as a marketing tool in yesterday's Sunday Times, which I think is apt.  Gerard Sheehy has started a campaign against the unfairness of the levy at [broken link removed]


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## Duke of Marmalade (4 May 2010)

_Fergie_ it is not as simple as the life industry is presenting it. I have been asked to compare the taxation of Deposit Trackers with Life Trackers. Presuming both subject to 28% DIRT/Exit Tax the issue is how the 5% Health Levy on Deposit Interest compares with the 1% upfront levy on insurance products. Broadly speaking the life product is favoured for terms greater than 5 years and vice versa and that does not sound unreasonable to me.

I have a gripe here.  The Consumer Protection Code requires any advert of an investment/deposit to explain the taxation.  Yet they never, ever mention the Health Levy and I note that the Government are also guilty of this regulatory breach with Savings Certs and the NSB.

Would it really have made any difference if the NSB had a 1% levy and, say, a 42% bonus to compensate? I agree with the _boss_ I won't be piling into this 10 year NSB. Now 5 year Savings Certs are a different matter.


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## mtk (4 May 2010)

The maths - they are assuming that you get no return on the 1% you receive which may not be as daft as it seems as its not clear to me you can access the 1% without cashing in a bit of the bond but perhaps i have misunderstood ?
If you can access it i agree the calcs are strange


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## Brendan Burgess (4 May 2010)

HI MTK

The 1% is paid at the end of every year, just like a dividend. You don't need to cash it in.


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## ringledman (4 May 2010)

Good investments for a government are generally bad investments for the individual.


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## LDFerguson (5 May 2010)

Brendan Burgess said:


> HI MTK
> 
> The 1% is paid at the end of every year, just like a dividend. You don't need to cash it in.


 
If I'm reading MTK's response correctly, I think s/he's making the point that you don't get any compound interest on your 1% once it's been added.  So you get 1% at the end of year 1 but that 1% doesn't grow any more for the balance of the ten years.


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## Duke of Marmalade (5 May 2010)

LDFerguson said:


> If I'm reading MTK's response correctly, I think s/he's making the point that you don't get any compound interest on your 1% once it's been added. So you get 1% at the end of year 1 but that 1% doesn't grow any more for the balance of the ten years.


The 1% is paid automatically into a State Savings Account which earns interest or from which you may make withdrawals, so it is correct to calculate AER using annual payments rather than a rolled up bullet payment.  _Boss_ is right, brochure is wrong.


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## noel 2006 (6 May 2010)

From the quote below it can be seen that the interest rate on the state savings account (into which the 1 per cent is paid) is variable.  Hence from the information in the brochure it is not possible to calculate the total annual return.  The figures given in the brochure seem to discount this element of compound interest.   
*Interest on Your State Savings™ Account *
[FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]13.1 Interest rates on the State Savings™ Account are variable and are subject to change as determined by the NTMA at their absolute 
discretion. Current interest rates are available on the State Savings™ website [/FONT][/FONT][FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]www.StateSavings.ie [/FONT][/FONT][/FONT][FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]or at any local Post Office. 
Any revision of interest rates will be notified to You by any one of the following methods : email, post, published in a national 
newspaper, published on our website or other electronic means. 
13.2 Interest will be calculated on the principal balance in Your State Savings™ Account on a daily basis and credited to 
Your Account in arrears, less DIRT at the prevailing rate, on the 31st December of each year. 
13.3 If You decide to close Your State Savings™ Account at any time, unpaid interest will be paid on the date Your Account is closed 
in respect of that year to date. No interest will be paid in respect of the day the account is closed. 
13.4 Your State Savings™ Account cannot be closed if You still hold a Bond. 
[/FONT][/FONT]_[FONT=Times New Roman,Times New Roman][FONT=Times New Roman,Times New Roman]_[/FONT][/FONT]


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## mtk (7 May 2010)

yes i think this is the logic


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## noel 2006 (11 May 2010)

A further thought on this: since you seem to have access to the 1 per cent interest without penalty, this could be reinvested at a higher deposit rate to boost the overall annual percentage return.  Perhaps someone could do the maths on what the return would be if, for example, you reinvested the money at 3 per cent gross interest.


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