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How does Interest Rate Accrual Range (IRRA) work?

See how Interest Rate Accrual Range (IRRA) may work for you under different scenarios

Introduction

Start by placing a structured deposit in your preferred currency

If the Interest Rate Reference stays at or within the accrual range, you'll receive interest at a higher accrual in rate. But if it fixes outside the accrual range, then you'll earn interest at the accrual out rate.

At maturity, you'll receive 100% of your principal[@investment-irrahowdoesitwork].

Illustrative example

Here's an illustrative example of what could happen if you invest in an IRRA product.

 

Customer view: US Dollar 3-month LIBOR will stay within the range of 0.25 - 0.60% (inclusive) in the coming 1 year.

Product details Interest payment
Payout upon maturity

Deposit Currency: RMB

Deposit amount: RMB1,000,000

Tenor: 1 year

Interest Rate Reference Index: US Dollar 3-month LIBOR (3M LIBOR)

Accrual range: 0.25% - 0.60% p.a.

Accrual in rate: 0.70% p.a.

Accrual out rate: 0.00% p.a.

Interest period: Quarterly

Interest payment for each interest period:
(Principal x Interest rate / 4)

Interest rate:

Accrual in rate x (No of days 3M LIBOR stays at or within the Accrual Range) / Total number of days

+

Accrual out rate x (No of days 3M LIBOR stays outside the Accrual Range) / Total number of days

100% of principal

Here's an illustrative example of what could happen if you invest in an IRRA product.

 

Customer view: US Dollar 3-month LIBOR will stay within the range of 0.25 - 0.60% (inclusive) in the coming 1 year.

Product details

Deposit Currency: RMB

Deposit amount: RMB1,000,000

Tenor: 1 year

Interest Rate Reference Index: US Dollar 3-month LIBOR (3M LIBOR)

Accrual range: 0.25% - 0.60% p.a.

Accrual in rate: 0.70% p.a.

Accrual out rate: 0.00% p.a.

Interest period: Quarterly

Interest payment

Interest payment for each interest period:
(Principal x Interest rate / 4)

Interest rate:

Accrual in rate x (No of days 3M LIBOR stays at or within the Accrual Range) / Total number of days

+

Accrual out rate x (No of days 3M LIBOR stays outside the Accrual Range) / Total number of days

Payout upon maturity
100% of principal

Scenario 1

Best-case scenario

The US dollar 3-month LIBOR stays within the accrual range throughout the whole deposit period.
Quarterly interest period Number of calendar days in the interest period
Number of days on which LIBOR stayed at or within the accrual range
Number of days on which LIBOR stayed outside the accrual range Interest Payment
1 93 93
0 RMB1,000,000 × [(0.70% ÷ 4) × (93 ÷ 93) + (0.00% ÷ 4) × (0 ÷ 93)] = RMB1,750.00
2 91
91 0 RMB1,000,000 × [(0.70% ÷ 4) × (91/91) + (0.00% ÷ 4) × (0/91)] = RMB1,750.00
3 91 91
0 RMB1,000,000 × [(0.70% ÷ 4) × (91 ÷ 91) + (0.00% ÷ 4) × (0 ÷ 91)] = RMB1,750.00
4 90
90 0 RMB1,000,000 × [(0.70% ÷ 4) × (90/90) + (0.00% ÷ 4) × (0/90)] = RMB1,750.00
The US dollar 3-month LIBOR stays within the accrual range throughout the whole deposit period.
Quarterly interest period 1
Number of calendar days in the interest period
93
Number of days on which LIBOR stayed at or within the accrual range
93
Number of days on which LIBOR stayed outside the accrual range 0
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (93 ÷ 93) + (0.00% ÷ 4) × (0 ÷ 93)] = RMB1,750.00
Quarterly interest period 2
Number of calendar days in the interest period
91
Number of days on which LIBOR stayed at or within the accrual range
91
Number of days on which LIBOR stayed outside the accrual range 0
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (91/91) + (0.00% ÷ 4) × (0/91)] = RMB1,750.00
Quarterly interest period 3
Number of calendar days in the interest period
91
Number of days on which LIBOR stayed at or within the accrual range
91
Number of days on which LIBOR stayed outside the accrual range 0
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (91 ÷ 91) + (0.00% ÷ 4) × (0 ÷ 91)] = RMB1,750.00
Quarterly interest period 4
Number of calendar days in the interest period
90
Number of days on which LIBOR stayed at or within the accrual range
90
Number of days on which LIBOR stayed outside the accrual range 0
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (90/90) + (0.00% ÷ 4) × (0/90)] = RMB1,750.00

The total interest earned would be RMB7,000 over the 1 year, at an effective interest rate of 0.70% p.a.

Scenario 2

Middle-of-the-road scenario

The US dollar 3-month LIBOR rises and stays outside the accrual range for some days during the deposit period.
Quarterly interest period Number of calendar days in the interest period
Number of days on which LIBOR stayed at or within the accrual range
Number of days on which LIBOR stayed outside the accrual range Interest Payment
1 93 87 6 RMB1,000,000 × [(0.70% ÷ 4) × (87 ÷ 93) + (0.00% ÷ 4) × (6 ÷ 93)] = RMB1,637.10
2 91
60 31 RMB1,000,000 × [(0.70% ÷ 4) × (60 ÷ 91) + (0.00% ÷ 4) × (31 ÷ 91)] = RMB1,153.85
3 91 15 76 RMB1,000,000 × [(0.70% ÷ 4) × (15 ÷ 91) + (0.00% ÷ 4) × (76 ÷ 91)] = RMB288.46
4 90
0 90 RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 90) + (0.00% ÷ 4) × (90 ÷ 90)] = RMB0.00
The US dollar 3-month LIBOR rises and stays outside the accrual range for some days during the deposit period.
Quarterly interest period 1
Number of calendar days in the interest period
93
Number of days on which LIBOR stayed at or within the accrual range
87
Number of days on which LIBOR stayed outside the accrual range 6
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (87 ÷ 93) + (0.00% ÷ 4) × (6 ÷ 93)] = RMB1,637.10
Quarterly interest period 2
Number of calendar days in the interest period
91
Number of days on which LIBOR stayed at or within the accrual range
60
Number of days on which LIBOR stayed outside the accrual range 31
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (60 ÷ 91) + (0.00% ÷ 4) × (31 ÷ 91)] = RMB1,153.85
Quarterly interest period 3
Number of calendar days in the interest period
91
Number of days on which LIBOR stayed at or within the accrual range
15
Number of days on which LIBOR stayed outside the accrual range 76
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (15 ÷ 91) + (0.00% ÷ 4) × (76 ÷ 91)] = RMB288.46
Quarterly interest period 4
Number of calendar days in the interest period
90
Number of days on which LIBOR stayed at or within the accrual range
0
Number of days on which LIBOR stayed outside the accrual range 90
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 90) + (0.00% ÷ 4) × (90 ÷ 90)] = RMB0.00

The total interest earned would be RMB3,079.41 over the 1 year, at an effective interest rate of 0.31% p.a.

Scenario 3

Worst-case scenario

The US dollar 3-month LIBOR rises sharply and stays outside the accrual range every day during the deposit period.
Quarterly interest period Number of calendar days in the interest period
Number of days on which LIBOR stayed at or within the accrual range
Number of days on which LIBOR stayed outside the accrual range Interest Payment
1 93 0 93 RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 93) + (0.00% ÷ 4) × (93 ÷ 93)] = RMB0
2 91
0 91 RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 91) + (0.00% ÷ 4) × (91 ÷ 91)] = RMB0
3 91 0 91 RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 91) + (0.00% ÷ 4) × (91 ÷ 91)] = RMB0
4 90
0 90 RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 90) + (0.00% ÷ 4) × (90 ÷ 90)] = RMB0
The US dollar 3-month LIBOR rises sharply and stays outside the accrual range every day during the deposit period.
Quarterly interest period 1
Number of calendar days in the interest period
93
Number of days on which LIBOR stayed at or within the accrual range
0
Number of days on which LIBOR stayed outside the accrual range 93
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 93) + (0.00% ÷ 4) × (93 ÷ 93)] = RMB0
Quarterly interest period 2
Number of calendar days in the interest period
91
Number of days on which LIBOR stayed at or within the accrual range
0
Number of days on which LIBOR stayed outside the accrual range 91
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 91) + (0.00% ÷ 4) × (91 ÷ 91)] = RMB0
Quarterly interest period 3
Number of calendar days in the interest period
91
Number of days on which LIBOR stayed at or within the accrual range
0
Number of days on which LIBOR stayed outside the accrual range 91
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 91) + (0.00% ÷ 4) × (91 ÷ 91)] = RMB0
Quarterly interest period 4
Number of calendar days in the interest period
90
Number of days on which LIBOR stayed at or within the accrual range
0
Number of days on which LIBOR stayed outside the accrual range 90
Interest Payment RMB1,000,000 × [(0.70% ÷ 4) × (0 ÷ 90) + (0.00% ÷ 4) × (90 ÷ 90)] = RMB0

The total interest earned would be RMB0 over the 1 year, at an effective interest rate of 0% p.a.

Scenario 4

Converting RMB to your home currency at maturity

Let's assume that the US dollar 3-month LIBOR stays outside the accrual range for every day during the interest period. That means there will be no interest payment throughout the investment tenor. We'll also assume that the initial spot price for RMB/HKD on the trade date is 1.2609 and that RMB/HKD depreciated by 0.06% during your investment tenor, resulting in RMB/HKD trading at 1.2601 on the maturity date. You then choose to convert your maturity amount from RMB back to your home currency of HKD.

In this scenario, the potential loss from the product could offset or even exceed the potential gain if your deposit currency (RMB) depreciates against your home currency (HKD).

So we would subtract the principal amount in HKD on the trade date from the principal amount in HKD at maturity:

(RMB1,000,000 × 1.2601) − (RMB1,000,000 × 1.2609) = −HKD800

This represents a loss of 0.06% of the principal amount in HKD.

Scenario 5

The Bank becomes insolvent or defaults on its obligations

Assuming that the Bank becomes insolvent during the tenor of this product or defaults on its obligations under this product, you can only claim as its unsecured creditor. You may get nothing back and suffer a total loss of your deposit amount.

If you redeem the product before its maturity, you may receive less than 100% of your initial investment amount. In the worst-case scenario, you may incur significant loss.

Return diagram

If the LIBOR stays between the accrual area (the highlighted area between 0.25% and 0.60% in this diagram), you'll receive interest at a higher accrual in rate. Otherwise, an accrual out rate will be applied to calculate the interest.

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Notes

    The above scenarios are provided for illustrative purposes only, and do not reflect a complete analysis of all possible gain and loss scenarios that may arise during any actual investment. No representation or warranty is made by the Bank that any scenario described above can be duplicated under real investment conditions. Actual results may vary from the results shown above, and variations may be material.

    Disclaimer

    • The information shown on this website is neither a recommendation, an offer, nor a solicitation for any investment product or service. Investment involves risk. You should carefully consider whether any investment product or service mentioned herein is appropriate for you in view of your personal circumstances. Past performance is no guide to future performance. Investors should refer to the individual product explanatory memorandum or offering document for further details including product features, fees and charges, and risks involved. The price of investment products may move up or down. Losses may be incurred as well as profits made as a result of buying and selling investment products.
    • Structured investment deposits are not regulated by the Securities and Futures Commission (the 'SFC'). The offering documents of structured investment deposits have not been reviewed by the SFC or any regulatory authority in Hong Kong. You should exercise caution when buying any structured investment deposits.

    Risk disclosure – Capital-Protected Investment – Interest Rate Range Accrual

    • Not a time deposit – Interest Rate Range Accrual is NOT equivalent to, nor should it be treated as a substitute for, time deposit. It is NOT a protected deposit and is NOT protected by the Deposit Protection Scheme in Hong Kong.
    • Derivatives risk – Interest Rate Range Accrual is embedded with interest rate option(s). Option transactions involve risks. If the Interest Rate Reference Index stays outside of the accrual range throughout the whole deposit period, you could earn no interest return.
    • Limited potential gain – The maximum potential gain is limited to the interest on the deposit calculated based on the accrual in rate.
    • Market risk – The interest return of the Interest Rate Range Accrual will depend upon the interest rate reference index during the deposit period. Interest rate movements can be unexpected, sudden and drastic, and can be affected by complex political and economic factors. You could earn no interest return if the interest rate reference index stays outside the accrual range throughout the deposit period. You must be prepared to take the risk of earning a very low return or even no return on the money invested.
    • Liquidity risk – Interest Rate Range Accrual is designed to be held until maturity. You should not use it as a short term investment vehicle. You do not have a right to request early termination of this product before maturity. Under special circumstances, HSBC has the right to accept your early redemption request at its sole discretion and on a case by case basis. HSBC will provide an indication of the redemption price upon such request. Your return upon such early redemption will likely be lower than that if the deposit were held until maturity and may be negative.
    • Credit risk of the Bank – Interest Rate Range Accrual is not secured by any collateral. When you invest in this product, you will be relying on HSBC's creditworthiness. If HSBC becomes insolvent or defaults on its obligations under this product, you can only claim as an unsecured creditor of HSBC. In the worst case, you could suffer a total loss of your deposit amount.
    • Currency risk – If the deposit is not in your home currency, and you choose to convert it back to your home currency upon maturity, you may make a gain or loss due to exchange rate fluctuations.
    • Risk of early termination by HSBC – HSBC shall have the discretion to uplift a deposit or any part thereof prior to the maturity date (subject to the deduction of such break costs or the addition of such proportion of the return or redemption amount, which may result in a figure less than the original principal amount of the deposit) if it determines, in its sole discretion, that this is necessary or appropriate to protect any right of HSBC to combine accounts or set-off, or any security interest, or to protect the customer's interests.
    • Risks relating to RMB – You should note that the value of RMB against other foreign currencies fluctuates and will be affected by, amongst other things, the PRC government's control (eg the PRC government regulates conversion between RMB and foreign currencies), which may adversely affect your return under this product when you convert RMB into your home currency. The value of your RMB deposit will be subject to the risk of exchange rate fluctuation. If you choose to convert your RMB deposit to other currencies at an exchange rate that is less favourable than that in which you made your original conversion to RMB, you may suffer loss in principal. This product (if denominated in RMB) will be denominated and settled in RMB deliverable in Hong Kong, which is different from that of RMB deliverable in mainland China.