NEGATIVE INTEREST RATES: IMPOSSIBLE, IRRATIONAL OR …

[Pages:15]Aswath Damodaran

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NEGATIVE INTEREST RATES: IMPOSSIBLE, IRRATIONAL OR JUST UNUSUAL?

March 2016 Aswath Damodaran

Negative Interest Rate Currencies: Central

Bank and Market Rates

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10-year Government Bond Rates: By

Currency (March 9, 2016)

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Interest Rates 101: An Intrinsic Interest

Rate

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Interest Rates 101: A Market Set Rate

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Intrinsic versus Market-set Interest Rates ?

Convergence and Divergence

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The Central Bank's Interest Rate Plays

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Negative Interest Rates

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? The conventional view of nominal interest rates is that they cannot be negative, since you have the option to hold cash (rather than save it at negative rates).

? This is based on the presumption that holding and using cash is costless and that may not hold for two reasons:

? Storing cash may require security (and its costs). ? Using cash for some transactions may be expensive and perhaps

infeasible.

? If you introduce costs to holding and using cash, nominal interest rates can be negative, albeit with a lower bound, since at some interest rate, it will be less expensive to hold cash.

Aswath Damodaran

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