How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask R. Klein, EA Your Own Question
R. Klein, EA
R. Klein, EA , Accountant
Category: Finance
Satisfied Customers: 3374
Experience:  TurboTax Expert. QuickBooks Certified Pro Advisor
63817126
Type Your Finance Question Here...
R. Klein, EA is online now
A new question is answered every 9 seconds

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: 4 years ago.
Category: Finance
Expert:  R. Klein, EA replied 4 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 and other Finance Specialists are ready to help you