Mongolian bank offering a high interest rate. What's the catch?
A bank called Khan Bank in Mongolia is offering to keep my savings at 15.10% interest rate, account denominated in Mongolian Tughriks. They give an example "if you saved 100.000 MNT on 2013/11/12 you would be getting interest amount equal to (100.000*15.1%)/365 everyday till 2014/03/07."
This interest rate sounds unreasonably high. What is the catch?
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This interest rate calculation is too simplistic. Return on investment is not Principal x interest rate /365. It is A= P(1+r/n)nt.
Normally, a high return comes with higher risk.
In this case there are two factors that offset the increased interest rate:
Exchange risk (Risk of inflation/devaluation in the Mongolian currency).
Safety risk (Risk of bank failure, corruption, and/or lack of strong insurance). This may not be a large risk, but it is nevertheless riskier than most banks backed by larger countries.
There is something called 'Interest rate parity' which simply put, says that the better interest rate you see here will be cancelled by the exchange rate change over time due to this currency's high inflation.
For those interested, the currency futures, which basically forecast the expected exchange rate) will also reflect the lack of a profit in the higher interest in the other currency.
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