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Negative Interest Rates

 
 
Reply Sun 17 Nov, 2019 02:15 am
In an attempt to stimulate GDP growth, interest rates have been pushed to negative territory in many currency areas, most notably Euro and Swiss Franc. Draw from your knowledge in bond and equity pricing to discuss the effect of this unconventional monetary policy on the price of assets and on risk. Also discuss possible ways out of this situation and what consequences these would entail.

Could anyone help me with this? I understand the relationship between interest rates and bond prices but I don't know what to add more?
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Type: Question • Score: 3 • Views: 348 • Replies: 6
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engineer
 
  1  
Reply Sun 17 Nov, 2019 10:12 am
@mashie909,
Negative interest rates means the government pays you to borrow money. What do you think that would cause to happen? Would companies borrow money just to invest abroad? Would they invest in good capital projects? Questionable ones? Would it be similar to the effect cheap capital had on the Chinese economy where the government essentially gives money to companies to expand?
livinglava
 
  0  
Reply Sun 17 Nov, 2019 10:49 am
@engineer,
engineer wrote:

Negative interest rates means the government pays you to borrow money. What do you think that would cause to happen? Would companies borrow money just to invest abroad? Would they invest in good capital projects? Questionable ones? Would it be similar to the effect cheap capital had on the Chinese economy where the government essentially gives money to companies to expand?

People don't want to buy property and be stuck in a mortgage for decades, potentially ending up underwater or unable to sell their property and move elsewhere, so they rent instead.

Governments are trying to stimulate people to buy properties by paying them to take mortgages, but what incentive is sufficient to motivate you to buy something that you know could eventually be worth less than you owe on it, or could be in an area that you no longer want to live in, or could become subject to tax policy changes that you don't want to be subject to?

All these factors deter people from wanting to own property and be in debt.

It also happens that low interest rates have caused property values to rise to levels that benefit current sellers, but which are exorbitant by many standards throughout the world. European cities are notorious for having sky-high property prices. People want desperately to live in those cities, but many are used to having the government provide social housing or otherwise protect them from the financial burdens of ownership.

On the other hand, there are strict codes and zoning regulations that limit what people can do with properties they own, how they can maintain them, what kind of materials they must use, whom they have to hire to do with work, etc. So ownership is not really ownership but more like being the person who shoulders the burdens of financial responsibility, liability, etc. for all the work and expenses the property may require.

With prices so high, however, it would be risky to allow people more freedom in how they handle their properties. As such, it is actually a security measure to restrict property-ownership rights so much, but doing so is a disincentive to ownership, and so paying people to take out big mortgages to keep real estate markets inflated ultimately ends up being more like a signing bonus for people to sell themselves into serfdom; albeit very high-stakes serfdom.

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Linkat
 
  1  
Reply Mon 18 Nov, 2019 12:57 pm
@mashie909,
mashie909 wrote:

In an attempt to stimulate GDP growth, interest rates have been pushed to negative territory in many currency areas, most notably Euro and Swiss Franc. Draw from your knowledge in bond and equity pricing to discuss the effect of this unconventional monetary policy on the price of assets and on risk. Also discuss possible ways out of this situation and what consequences these would entail.

Could anyone help me with this? I understand the relationship between interest rates and bond prices but I don't know what to add more?


Let me know where I can borrow. I in - I would borrow - get my interest payment (since this is negative I would get paid to borrow) and then immediately pay off the loan. I would keep doing so until I generated a cool million.

Thanks for the tip.
Walter Hinteler
 
  1  
Reply Mon 18 Nov, 2019 01:29 pm
@Linkat,
Quote:
Still Below Zero
Five years after negative interest rates first appeared, they were still in place in most of Europe, including the countries that share the common currency
https://i.imgur.com/DlNogRw.jpg



Bloomberg report: Negative Interest Rates
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engineer
 
  2  
Reply Mon 18 Nov, 2019 01:46 pm
@Linkat,
Unfortunately, we are far down the interest rate ladder. Banks get negative rates, we still pay.
Linkat
 
  1  
Reply Mon 18 Nov, 2019 02:39 pm
@engineer,
engineer wrote:

Unfortunately, we are far down the interest rate ladder. Banks get negative rates, we still pay.


Then I am going to open a "bank". Damn I wouldn't need any other business than borrowing from the government!
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