Intentional Finance

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with negative yields?

Investors may buy bonds with negative yields for a range of reasons. Investors may be willing to take a slight loss if they perceive the bond to be a safe place to invest avoiding unnecessary uncertainty. Foreign investors may be happy to own bonds with negative yields if they think the currency of the bond is likely to rise and offset the negative yield. Domestic investors might also buy negative yielding bonds if they expect a period of prolonged deflation where a real return is possible. For example, a domestic owner of a Japanese bond can expect real positive yield. A real positive yield can occur even nominal loss occurs because they value of their savings to purchase goods and services has increased. Finally, investors may be looking for a capital appreciation. Bond prices have an inverse relationship with yield and if yields fall further the price of the bond will increase.

Why do firms internationalise?

 This theory is usually couched as theories of FDI – why do firms invest in real assets abroad?

1. Market-seeking

2. The search for raw materials (raw materials-seeking)

3. Production efficiency seeking

4. Knowledge-seeking

5. Political safety seekers

s\Separation of ownership from management

raises the possibility that the two entities will not be aligned in their business and financial

objectives. This is the so-called agency problem.

 Ex-post real interest rates

– Looking back, what real rate of interest did you make on your investment? Can this be negative?

 Ex-ante real interest rates

– Looking forward, what real rate of interest do you expect to earn on your investment? Can this be negative?