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R. Klein, EA
R. Klein, EA, Accountant
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Explain why realized real rates of interest are sometimes negative

Resolved Question:

Explain why realized real rates of interest are sometimes negative but expected real rates are always positive. Give an example.
Submitted: 2 years ago.
Category: Finance
Expert:  R. Klein, EA replied 2 years ago.

fastfile :

An explanation of the negative interest is when you pay a premium for a cash flow which has a stated rate of interest.

fastfile :

Example:

fastfile :

You buy a note from a seller. The terms of the note are 100K loan at 8% interest for 1 year.

fastfile :

The face value of the note is $100K. You might buy the note (for whatever reasons) from the note-maker for $110K.

fastfile :

The payments remain at 8% interest. However, because you invested more, your real return is negative. You invested $110K and in return, you will receive monthly payments totaling $104,385. Your effective investment return is -9.5%

fastfile :

usually it is not this extreme, but it shows you the example.

fastfile :

This premium situation is common with bond sales.

R. Klein, EA, Accountant
Category: Finance
Satisfied Customers: 2882
Experience: Intuit Ask a Tax Expert. QuickBooks Certified Pro Advisor (all editions)
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