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Feb 16, 2011 at 07:20 AM

money market deposit with bonus rate : how to set up an manage ?

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case :

bank deposit : max term = 1 year

If you stay in for the full year you received euribor 1 year - 0.03% fixed at the start

If you get out after 3 months you received euribor 3 months - 0.15% fixed at the start

If you get out after 6 months you received euribor 6 months - 0.10% fixed at the start

If you get out after 9 months you received euribor 9 months - 0.08% fixed at the start

As you don't know in advance when you will exit (hence you don't know the final interest rate) , how to handle accruals?

Because, if I start accrueing at the lowest rate (3m euribor -0.15%) and we go further than 3 months, I don't want to reverse all monthly accruals (which have been underestimated).

What would be the best solution? Do I really need to decompose the product into a deposit for 12 months and create some kind of interest rate options which I would need to evaluate separately? I am not even sure that this would make sense. Is there no clever, yet simple way to handle this ?

Thanks,

Carl