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Halifax will sell me a 3-month bond paying 6.85%, a 6-month bond paying 6.5%, a 1-year bond paying 6.45%, a 3-year bond paying 6.4%, or a 5-year bond paying 6.2%.
I thought that longer terms were supposed to be rewarded by better interest rates; on the other hand, why shouldn't I jump at this?
If I assume that Halifax would rather borrow money on the money-markets, where LIBOR is 6.61%, than through the time-consuming process of assembling small sums from thousands of tiny savers, then I conclude that the money markets want to charge Halifax perceptibly more than 6.85%. I think that this means that they believe there is a chance of perceptibly more than 0.89% [(6.85 / 6.61) ^ (3/12)] that Halifax will be unable to repay.
On the other hand, I'm a small saver, and the regulatory framework likes small savers. If Lloyds lend Halifax fifteen million pounds, and Halifax goes bust, Lloyds get nothing back. If I lend Halifax fifteen thousand pounds, and Halifax goes bust, I get £13,700 back. So I should be more willing to lend Halifax money than Lloyds is - indeed, since the money is otherwise making 5.8%, I should lend it to Halifax if I believe the odds of Halifax still being around in mid-February are better than about 20:1 for.
This seems somehow counter-intuitive; on the other hand, I will go off to the local Halifax tomorrow with a chequebook. There is then the question of hedging: I wonder what odds the local Ladbrokes will offer on Halifax being bust by mid-February?
I thought that longer terms were supposed to be rewarded by better interest rates; on the other hand, why shouldn't I jump at this?
If I assume that Halifax would rather borrow money on the money-markets, where LIBOR is 6.61%, than through the time-consuming process of assembling small sums from thousands of tiny savers, then I conclude that the money markets want to charge Halifax perceptibly more than 6.85%. I think that this means that they believe there is a chance of perceptibly more than 0.89% [(6.85 / 6.61) ^ (3/12)] that Halifax will be unable to repay.
On the other hand, I'm a small saver, and the regulatory framework likes small savers. If Lloyds lend Halifax fifteen million pounds, and Halifax goes bust, Lloyds get nothing back. If I lend Halifax fifteen thousand pounds, and Halifax goes bust, I get £13,700 back. So I should be more willing to lend Halifax money than Lloyds is - indeed, since the money is otherwise making 5.8%, I should lend it to Halifax if I believe the odds of Halifax still being around in mid-February are better than about 20:1 for.
This seems somehow counter-intuitive; on the other hand, I will go off to the local Halifax tomorrow with a chequebook. There is then the question of hedging: I wonder what odds the local Ladbrokes will offer on Halifax being bust by mid-February?
no subject
Date: 2007-12-07 08:47 pm (UTC)Bear in mind that Nationwide are still offering 6.70% for 1 year. Also, unless you've already filled your ISA limit, there are ISAs on offer that work out as a better deal after taking tax off.
Remember that LIBOR is an average; I don't know what the notional risk-free rate is, but it'll be less than 6.61%.
I don't really understand this stuff despite working for a group most of whose members have it as their job to know it; but I don't think your exponentiation is correct - the risk of them being bust in 3 months is more than the risk of them being bust in 1 month^3.
That rate may well also have an element of them drawing in money that will then be likely to be be left with them afterwards.
no subject
Date: 2007-12-07 10:40 pm (UTC)The FSCS site says that they will compensate 100% up to 35k.
Northern Rock deposits appear to be 100% guaranteed to infinity, even newly-opened ones; on the other hand, to pick a 6.71% one-year bond from NR over a 6.70% one-year bond from Nationwide indicates a level of risk-return preference which would predict that I'd spend all my weekends skydiving and be lackadaisical as to whether I remembered the parachute or not.
no subject
Date: 2007-12-08 12:08 pm (UTC)no subject
Date: 2007-12-10 01:55 pm (UTC)