For quite some time now, several governments have been issuing
bonds with negative interest rates. Even some large corporations
have been able to do so. Our gut reaction is to dislike negative
interest rates—why, indeed, would anybody be fool enough to
pay an interest rate in order to lend money, i.e. to take a risk
without apparent reward? Buying a bond with a negative interest
rate is basically the equivalent of your bank paying you to borrow
money from them. It makes hardly any sense when looking at it this
way, but there are actually many reasons to buy negative interest
bearing securities.
A bit of economic theory
Before jumping into the topic, let's first consider interest
rates from a theoretical point of view. Interest rates can be
broken down as follows in traditional finance theory:
