Here at Family King we tend to pay money to the banks. But our friends Tony and Sonia have reached that enviable position where they want the banks to pay them some money. So T&S went to check out term deposits at the banks.
This is where the oddity starts.
For example at the Commonwealth Bank, if you invest $10,000 to $49,999 in a term deposit for 7 months (4 weekly interest payments) you get 5.95%. If you invest for 8 to 11 months you get 3.20%. But 12 months gives you 5.90% before it falls back to 5.30% for 13 to 23 months.
You would expect that as you lock your money up for a longer period (with associated reduction in flexibility and increased risk) you normally get a higher return. But this is turned on its head at the Commonwealth Bank except for very specific maturities.
They are not alone. At the Bank of Queensland (interest paid annually) you get 6.30% for 6 months ($5,000 to $49,999), 3.40% for 7 months, 3.50% for 8 months 6.35% for 9 months then 3.60% for 10 months.
Hmmm. The dinner discussion between T&S and the Family King looked at transactions costs but we couldn’t see how this explained the high variability and lower rates for longer term investments. We wondered about the costs of coordinating term lengths – but this didn’t gell as people invest at different times so there is no ‘maturity coordination’ issue. We wondered why 6 months was a ‘good’ term for the BoQ but not 7 months while the reverse holds for the Commonwealth (6 months is 3.20% for them). After failing miserably to explain the rate structure we:
- decided to hand it over to the readers of CoRE Economics to try and explain it for us; and
- headed back for another beer.
If anyone knows the reason for these rate structures, please let us know.