Why an LCI or LCA loses profitability over time, and you money – 10/20/2023 – From Grain to Grain

How many times have you analyzed the return obtained from a bank bond? This analysis will show that some bond characteristics result in a worse return than the contracted rate. That’s right. You’re earning less than you thought, and you probably don’t even know it. I explain in what type of titles this occurs and why.

In one of my articles this week, I mentioned that an LCI or LCA that promises to pay 90% of the CDI will only yield 85% of the CDI in 10 years.

Many readers asked me how this could happen. In other words, how do you contract an investment to gain profitability and end up earning less than you expected?

The question is how the profitability of securities referenced to the CDI is calculated.

I’m going to tell you how you imagine the return of an LCI or LCA maturing in 2 years that promises to pay 90% of the CDI is calculated and how it is actually calculated. The two forms are not the same.

You probably imagine that to obtain the final profitability, you calculate how much the CDI accumulates over the two years and then multiply it by the CDI percentage. For example, imagine you applied two years ago. In this case, the CDI in the period yielded 26.25%. You probably believe that your LCI should have yielded 26.25%*90% = 23.63%.

However, this is not the profitability you gained. I explain below how profitability is actually calculated.

The CDI is a daily rate. Therefore, you must accumulate the CDI return multiplied by 90% daily. Maybe you ask yourself: but doesn’t it give the same result? No.

Return accumulation is calculated on a compound basis. Thus, the CDI from the previous day that was multiplied by 90% is multiplied by the next one which is also multiplied by 90%. This successive product causes the final return to be lower. I explain with a simpler example.

Do the following experiment. Multiply 90% by 90% by 90%. If you make this product, you will see that the result is 72.9%, that is, much less than 90%. This example is exaggerated, but it illustrates the case.

The actual profitability calculation is done as follows. Currently, the one-day CDI is 0.0473%. To calculate the return of 90% of the CDI in 3 days it would be: (1+0.0473%*90%)*(1+0.0473%*90%)*(1+0.0473%*90%). With a 2-year LCI, this calculation would be repeated about 504 times. In ten years, it would be a product of these terms by 2500 times. Note that the 90% multiply with each other as in the simple example I gave above.

Let’s go back to the example of the LCI or LCA maturing in 2 years, which promises to pay 90% of the CDI. At the end of the last 2 years, the return was 23.34%, that is, 88.9% of the CDI. Therefore, lower than the 90% of the CDI you imagined earning.

This return becomes increasingly distant from that contracted the longer you invest with a return lower than 100% of the CDI.

Let’s go back to the exaggerated example to illustrate what would be better. Multiply 110% of the CDI three times in the same way as we did with 90% in the example. The result is 133.1%, that is, greater than 110%.

This similar upward compounding effect occurs when you invest in CDBs that yield more than 100% of the CDI. Therefore, for the long term, CDBs that yield more than 100% of the CDI can be much better than LCI or LCA. You will find higher returns at medium banks.

Take advantage of the higher return on CDBs from medium-sized banks within the FGC guarantee. Don’t listen to anyone who comments that the FGC is unable to cover the risk of medium-sized banks. I did an interview in this column with the CEO of the FGC, Daniel Lima. Listen to those who understand.

Therefore, be careful if you think you are doing a great deal by avoiding taxes and always investing for a year in LCI or LCA and continuing to renew. Calculate how much you’ve already left behind in return if you’ve done this in the past.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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