What is interest, and where can attractive income opportunities be found?
Interest is the price you pay for borrowing money. The amount of interest depends on the agreed interest rate. The interest rate is usually represented by the per cent sign (%), where “per cent” means “of one hundred” or “hundredth
What percentages are currently (as of 2022) offered?
- Giro account, approx. 0% to 0.10%, often even negative interest rates;
- Savings account, approx. 0% to 0.15;
- Call money, approx. 0% to 0.20%;
- Time deposit, approx. 0% to 1.50% ;
- German government bonds – “In January of 2022, the yield on ten-year German government bonds averaged about -0.06%. This is an increase of almost 89% compared to January of the previous year. At that time, ten-year federal bonds were still yielding around -0.53%.” (Statista, 2022);
- First-class bonds, achievable bond interest rates depending, among other things, on the maturity & default risk of the issuer (approx. 0% to 3%);
- High-yield corporate bonds (interest rates of approx. 4% to 9%): This is where it gets interesting for investors looking for an attractive alternative to stocks. For over 20 years, Genève Invest has specialised in high-yield corporate bonds.
Genève Invest focuses on corporate bonds
Genève Invest focuses on corporate bonds with an outstanding risk-return ratio. In particular, we look for high-yield bonds issued by medium-sized companies in AAA-rated countries that are active in a stable market environment.
In addition, we specifically look for niche themes able to generate a yield of 4% to 9%. Niche issues include bonds with a volume of less than 100 million euros. Corporate bonds with a final maturity yield below 3 % are systematically reduced as the risk-return ratio becomes negative.
In the following, we show you a sample portfolio (exclusively corporate bonds) for an investment of approx. 300,000 EUR. Such an interest rate calendar is always provided to Genève Invest clients in an updated form.
The interest rate calendar serves as a guide:
- Dates (distribution days) on which certain amounts of interest income flows into the account;
- An overview for each quarter and for the entire year
- In addition, each client receives further information on the issuers, the interest yield, the investment amount, the purchase price and the maturity of each bond.
The model portfolio shows that attractive investment opportunities may be found in this segment. An actual sample portfolio (with a list of bond issuers) can be sent at any time on request.
The deposit rate & lending rate briefly defined
What is most easily understood by everyone is the interest rate on deposits: people save money in their bank accounts. In return, the bank can pay interest to the account holder. The interest rate depends on the general interest rate level and the deposit amount. In addition, as a rule, the longer savers hold on to their money, the higher the interest rate usually is.
On the other hand, if you want to buy something for which your savings are insufficient, you can borrow money, e.g., via a loan from a bank. For this, the borrower – i.e. the person who draws the money – has to pay interest to the bank. The amount of this so-called loan interest depends, among other things, on how creditworthy the borrower is: the higher the risk for the bank that the borrower cannot repay the loan, the higher the interest rate the borrower has to pay. Furthermore, the interest rate depends on the duration of the loan. The longer the bank makes the money available, the higher the interest rate
But there is yet another interest rate
There is yet another rate which greatly influences all other interest rates: the base rate. When banks need money, they ultimately have to borrow it from the central bank. For this, they have to pay interest. The base rate is the amount of this interest as a percentage of the borrowed amount. In the Eurozone, it is set by the Council of the European Central Bank, which pursues the goal of keeping the purchasing power of money stable.
Development of the European Central Bank's interest rate for the main refinancing operation from 2008 to 2022 (Statista, 2022):
Date: April 2022
An experienced asset manager can provide much helpful advice in this respect.
The base rate influences all other interest rates in an economy and thus also impacts the entire economic life: If the central bank raises the base rate, the commercial banks also raise the interest rates for their customers. As a result, loans become more expensive for customers, and saving becomes more worthwhile. In this way, demand in the economy tends to fall and, as a result, the upward pressure on prices lessens. Conversely, falling interest rates stimulate the demand for credit and make saving less attractive. Thus, demand in the economy rises, and, as a result, prices also tend to rise faster.
The indicator for the development of prices is the inflation rate. The inflation rate is important in connection with two other interest rate concepts: the nominal and the real interest rates. The quoted interest rates are referred to as nominal interest rates. If you subtract the inflation rate from the nominal rate, you get real interest rates.
So interest is not the same as interest. Savers are happy about high interest rates. Borrowers, on the other hand, are delighted if their interest rates are as low as possible. And everyone – banks, businesses, consumers and the state – watches the base rate as an important signal for the economy.
You need to invest your money strategically! Corporate bonds & stocks can offer attractive interest rates & returns.
Inform yourself about attractive investments & interest rates!
The interest rate significantly determines the return on a financial investment. In principle, the higher the interest rate on an investment, the higher the return. Of course, the same also applies in the reverse case.
In the case of an investment in a savings account, a fixed-term deposit or a term deposit, the relationship between interest rate and return is easy to understand. The interplay between interest and return is somewhat more complex when investing money in a fixed-interest security, a bond. For in addition to the pure interest rate, the following factors also come into play:
- The maturity (or remaining term);
- The price development of the bond;
- The frequency of the interest coupon, i.e., the interest payments
