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IN TODAY’S DEBT MARKETS MANY SOVEREIGN AND CORPORATE BONDS OFFER A NEGATIVE YIELDS TO MATURITY. YOU...

IN TODAY’S DEBT MARKETS MANY SOVEREIGN AND CORPORATE BONDS OFFER A NEGATIVE YIELDS TO MATURITY. YOU CAN FIND SOME GENERALITIES ON NEGATIVE INTEREST RATES AND YIELDS HERE AND HERE. HOW DO YOU RECONCILE THIS FACT WITH THE BASIC FINANCIAL PRINCIPLE THAT MONEY HAS “TIME VALUE”?

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Negative interest rates refers to the unusual concept wherein borrowers are paid interest for borrowing funds rather than paying interest to lenders. This generally occurs when an economy goes into recession when market forces have already pushed the interest rate to zero. This is prevalent when individuals and businesses end up saving more than spending.

This concept goes against the fundamental concept of time value of money which states that a dollar today has more value than a dollar tomorrow. Hence, to borrow money today, a borrower must pay interest (premium) over a period of time to a Bank or financial institution as they are lending money and foregoing their liquid funds at present.

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