No, it is not possible!
If it was possible, all investment managers across the globe will be investing in such a structure or product and the world would be a happy place. Be careful, be very careful …
Let us first spend some time explaining what the ‘risk-free rate’ is and how a guarantee is enforced. The risk-free rate is the rate that a country’s reserve bank, also referred to as the central bank, lends money to commercial banks. The central bank/reserve bank is therefore the bank of commercial banks, and the interest rate of the central bank is referred to as the repo rate which in SA currently sits at 6.25%.
Commercial banks are allowed to add some margin to the repo rate which determines commercial banks’ prime lending rate, currently at 9.75%.
Commercial banks will provide funding to individuals and corporates at a rate above or below their prime rate based on the creditworthiness of their borrowers.
Commercial banks raise funding by onward lending the funds they receive from the central bank. They also raise funding by borrowing money from individual and corporate investors/savers which they in turn lend onward again to clients of the bank by way of loans and asset financing.
In order to attract funding from individuals and corporates, commercial banks need to offer attractive interest rates that vary according to terms and the respective institutions. Generally, longer-term fixed deposits offer higher interest rates than shorter…
