Weekly Nugget: Analyzing financial situations using our online App

Investing wisely in risk free alternatives

Using our three interest rates submenu

November 20th, 2025

Introduction

Interest is the single most important concept in finance. It is basically a Price and it is usually expressed as a ratio, there are two parts to the transaction:

  • How much the borrower is willing to pay, per 100 units of currency, to the owner of a certain amount of money, for the right to use it over a given agreed upon period.
  • What is the minimum amount of money the lender is willing to accept, per 100 units of currency, to cede the right to use that money to the borrower over a given agreed upon period.

Another important rate is the rate of inflation for a given economy in a given periodof time. The inflation rate measures how the prices of goods change over time. Its value depends on the goods that are used to measure the original and final price and the location and times when the prices for the various goods are recorded. Various government and private sector agencies in every country periodically estimate twelve month or quarterly price changes for various baskets of goods.

The effective interest rate reflects the change in monetary units and, when normalized by the inflation rate for that period, results in the real interest rate, which reflects the actual change in purchasing power (for a given basket of goods).

Unfortunately, most people are unaware of these concepts or are apparently careless with their money.

Unwise choices

How else can we explain why people continue to use savings accounts or invest in certificates of deposit (CDs or equivalent) despite the vast disparity between what banks worldwide typically pay their customers through these instruments and the interest each government pays to holders of government-issued securities? These are known in the United States, the United Kingdom, several European countries, and many others as Treasury Bills or Bonds, depending on their maturity.

Relatively riskless alternatives

Savings and CD accounts tend to be insured, at least up to a certain limit, but government issued securities in the local currency tend to have very low risk. The Eurozone is of course a special case and Greece in 2010 was an exception, but even in such cases there are always warning signs several months in advance.

An Example

We may easily exemplify this idea using the largest market, the United States. According to the Federal Deposit Insurance Corporation (FDIC) the average yearly interest rates paid on a savings account are 0.4%, and on a 12-month CD 1.64% Meanwhile a 12-month Treasury Bill pays 3.7%. However, according to the FDIC approximately 95.8% of american households have either a checking or savings account.

Why do people use savings or CD accounts? Nowadays you may purchase treasury bills directly with a minimum investment of $100 USD through TreasuryDirect.gov or through a bank or broker and other countries have similar ways to invest in government issued securities. Checking accounts are understandably necessary but Savings accounts and CDs?

If you put your money in a savings account paying an annual nominal interest rate of 0.4% with monthly capitalization, then you may use Finnugget's three basic rates submenu in the interest rates menu item, to find out how much money you would actually receive, and more importantly, given a certain inflation rate, how much your purchasing power would change.

Example using savings account

Figure 2 shows that if you were to leave your money for 12 months and assuming that the yearly inflation turns out to be 3.2% (the current low estimate for the yearly inflation in the US), then by the end of the twelve month period, you would have received 1.004003 times the amount of money you originally invested, but you would be able to then buy just 97.2872% of what you could originally purchase. That is, you would lose 2.7128% of your purchasing power.

However, if you had invested in T-bills paying a 3.7% effective yearly interest rate for one year, then using the same yearly rate of inflation of 3.2%, you would receive 1.037 times the amount you had invested, and its purchasing power would be 100.4844% what it originally was, see Figure 3. That is, your purchasing power grew slightly 0.4844% It did not grow a lot but at least you did not lose purchasing power!

T-Bill example

You are, of course, welcome to use finnugget as often as you want to.

It is important for you to understand that interest rates change over time and that they tend to adjust right after central banks publish their main policy rate. Figure 3 shows how these rates have changed over the past twelve months for the central banks of the seven largest economies.

Reference interest rates for G7 Central Banks

With the exception of the Bank of Japan, which continues to have by far the lowest rate, all other central banks reduced their main policy rate. As those rates change all other interest rates in a given economy are adjusted: interbank rates and then the interest rates of all other financial products and services as well as the amounts offered in bond auctions.

Conclusion

Investing time in learning key financial concepts always pays off. Knowledge of key concepts and adequate use of financial tools such as Finnugget will assist you in achieving your financial goals.

Let us know what you think. Until the next post!