07-03-2016, 10:43 AM
(07-03-2016, 09:06 AM)CityFarmer Wrote: [ -> ](06-03-2016, 10:38 PM)Caelitus Wrote: [ -> ]If we do a decision tree with the highest default rate (as computed by the funding platform) and compare that with the alternative of leaving your money in say OCBC 360, the interest rate required to compensate one to offer funds to them should be higher. It is far easy for a layman to be seduced by the rates bandied around.
Next, if I am not wrong, one has to declare income received from such lending activities for income tax.
IIRC, bank interest is also subjected to income tax. The only exception is POSB.
I don't quite understand the first paragraph. I reckon, diversification is a necessity to participate the crowdfunding. Concentrated approach is never right IMO.
For example, if a company was issuing a note for 6 months and the P2P platform has assessed the probability of default to be between 4 to 5.075%, that means the probability of repayment is 94.925%. Assume the borrower was dangling 18% p.a. interest, should we bite? Many people instinctively would.
If we take 2.25% p.a. offered by OCBC 360, the quick view is that without taking up the note, you would have an expected value of $1,011.25 at the end of the 6 months. The expected value for 'investing' in that note needs to account for the probability of default. Hence the expected value is $941.16 which is lesser. With no change in the offered rate, one should not take it up.
Therefore, if we work backwards, we can compute the rate which will swing the decision. That is when the expected value of a yes decision exceeds the expected value of a no decision. That will be at 23.756% which just nudges it higher than the bank's returns.
It is advised to do the due diligence and run the rule over the industry the borrower is in, the use of the borrowed monies, background etc. As many members have pointed out in other threads, there is no sure-to-win investment. Some say the chance of a default is so remote, sure-to-win. Even if there is a problem, recourse can be sought from the P2P companies. Sounds familiar?
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