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Could I use Interest Rates to Do This?

  • #1
  • First Post: Mar 9, 2007 6:59pm Mar 9, 2007 6:59pm
Greetings all,

I am trying to understand just what exactly interest rates mean. The United States has an interest rate of 5.25%, but what type of investment actually earns this amount of interest? Where could I invest my money to get a 5.25% return?

Also what about the interest rates of other countries besides the United States, could I invest there? For example New Zealand has an interest rate of 7.25%. Could I exchange my US dollars for New Zealand dollars and get a 7.25% return on my money? I imagine it can’t be this simple, but could someone please explain exactly how this works.

Thanks
  • #2
  • Mar 9, 2007 7:03pm Mar 9, 2007 7:03pm
Essentially, what you're describing is a form of the carry trade.

Yes, you could take out a loan of USD at 5.25% and buy NZD that will pay you 7.25%...the problem you will face is that if the NZD falls against the USD, then when you buy back the loan, your NZD may have gained interest, but not enough to overcome the drop in the NZD against the USD...so when you convert your NZD back into USD to pay of your USD loan, you LOSE money.

So, it isn't so simple that simple.

Quoting Crestwind
Greetings all,

I am trying to understand just what exactly interest rates mean. The United States has an interest rate of 5.25%, but what type of investment actually earns this amount of interest? Where could I invest my money to get a 5.25% return?

Also what about the interest rates of other countries besides the United States, could I invest there? For example New Zealand has an interest rate of 7.25%. Could I exchange my US dollars for New Zealand dollars and get a 7.25% return on my money? I imagine it can’t be this simple, but could someone please explain exactly how this works.

Thanks
  • #3
  • Edited 7:14pm Mar 9, 2007 7:12pm | Edited 7:14pm
Ing.com, Emigrant.com, Citibank.com and even wamu.com offer savings account with 5+ percent and no minimum. Paypal.com money market account is good too.

edit: emigrant.com might not be the corect one. https://www.emigrantdirect.com is the real one.
  • #4
  • Mar 9, 2007 7:20pm Mar 9, 2007 7:20pm
I guess I didn't really read your entire post correctly. I apologize.

The 5.25% interest rate is the Fed funds rate which is the overnight rate that banks charge each other.

For the most part, you won't find investments that give you the 5.25% interest rate without any risk. As stated by the previous poster, some savings accounts will come close, but as the fed funds rate goes down, so will the rate of those savings accounts.

As far as NZD and AUD investments (like finding savings accounts over there), my previous post would be correct. If you were to open an ING-type savings account over in Australia to take advantage of those rates, you'd have to convert your money to AUD first. Then you'd get your interest rate. However, the problem still remains that if the USD rallies against the AUD, when you take your money out of the Australian bank to convert it back to USD, even though your principal would have grown, the conversion back to USD may wipe out any gains that you had in interest.

So while it would be "that simple", you are still subject to fluctuations in the currency exchange.

Quoting Crestwind
Greetings all,

I am trying to understand just what exactly interest rates mean. The United States has an interest rate of 5.25%, but what type of investment actually earns this amount of interest? Where could I invest my money to get a 5.25% return?

Also what about the interest rates of other countries besides the United States, could I invest there? For example New Zealand has an interest rate of 7.25%. Could I exchange my US dollars for New Zealand dollars and get a 7.25% return on my money? I imagine it can’t be this simple, but could someone please explain exactly how this works.

Thanks
  • #5
  • Mar 9, 2007 7:49pm Mar 9, 2007 7:49pm
A certificate of deposit purchased at a bank could get you approx 5.25% or even a little higher for longer term. Each CD is insured by the government, up to $100,000 per institution I believe, so this is risk free.
"Its not where your at, but where your coming from"
  • #6
  • Mar 9, 2007 8:04pm Mar 9, 2007 8:04pm
Yes, any broker or bank will be able to help you access 5.00-5.25% interest quite easily.

You need an address in New Zealand, Australia to open money market accounts in their banks. That at least is INGs requirement. I looked it up

Carry trading is more fun, though a lot greater risk.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #7
  • Mar 9, 2007 9:57pm Mar 9, 2007 9:57pm
Quoting nitman
Ing.com, Emigrant.com, Citibank.com and even wamu.com offer savings account with 5+ percent and no minimum. Paypal.com money market account is good too.

edit: emigrant.com might not be the corect one. https://www.emigrantdirect.com is the real one.
is it secure and guarantee?
  • #8
  • Mar 9, 2007 10:01pm Mar 9, 2007 10:01pm
Thanks everyone that answered. I think I have a better understand of interest rates.
  • #9
  • Mar 10, 2007 12:24am Mar 10, 2007 12:24am
Quoting amenlo9
is it secure and guarantee?
So long as the bank/group you are with is covered by the FDIC. The FDIC insures up to $100k and that is guaranteed. As far as the rates go, they are subject to change if you have a money market. CDs will not change (at least from my experience), though I do believe when you agree to the term 5 months - several years, there is the agreement that they will not change the rates. Some may be constructed different than others.

Capital One, ING and others have nice setups that pay 5.00% and allow you to withdraw money whenever you like.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #10
  • Last Post: Mar 10, 2007 12:56am Mar 10, 2007 12:56am
Again, I forgot, there are some high-interest rate CDs out there. WAMU actually has a few 5.35% ($10K minimum) CDs. However, that money isn't liquid. You have to hold it there for like 8 months at least. Otherwise, you get charged a penalty.

However, I reiterate that if you open a bank in a foreign country, they will require that you convert your currency to whatever native currency they use...and then they'll give you their interest rate at whatever their central bank rates are. However, when you come back to convert your currency, if the dollar has weakend against the native currency, you will LOSE money regardless of how much interest you've made.

Quoting StockKJay
So long as the bank/group you are with is covered by the FDIC. The FDIC insures up to $100k and that is guaranteed. As far as the rates go, they are subject to change if you have a money market. CDs will not change (at least from my experience), though I do believe when you agree to the term 5 months - several years, there is the agreement that they will not change the rates. Some may be constructed different than others.

Capital One, ING and others have nice setups that pay 5.00% and allow you to withdraw money whenever you like.
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