# What is a Discount Called in the Context of a Negative Interest Rate?

I was reading this article about negative yields on bonds when I wondered if you'd still call a Discount a... Discount or something else in this context?

In the example, the interest rate is -0.05% for ten years. So a $100,000 bond under those terms would be "discounted" to$100,501, give or take.

• Maybe with a negative rate it's a premium... – quid Jul 13 '16 at 21:01
• "So a $100,000 bond under those terms would sell at a premium of$100,501, give or take". Works for me, @quid. – Bob Kaufman Jul 13 '16 at 23:48
• Don't forget the annual or semi-annual coupon payments... – DJohnM Jul 14 '16 at 2:21

Even though the article doesn't actually use the word "discount", I think the corresponding word you are looking for is "premium".

The words are used quite frequently even outside of the context of negative rates. In general, bonds are issued with coupons close to the prevailing level of interest rates, i.e. their price is close to par (100 dollar price).

Suppose yields go up the next day, then the price moves inversely to yields, and that bond will now trade at a "discount to par" (less than 100 dollar price). And vice versa, if yields went down, prices go up, and the bond is now at a "premium to par" (greater than 100 dollar price)

Negative Yields on Bonds is opposite of Getting profit on your investment. This is some kind of new practice from world wide financial institute.

the interest rate is -0.05% for ten years. So a $100,000 bond under those terms would be "discounted" to$100,501, give or take.

No, actually what you are going to get out from this investment is after 10 years when this investment is mature for liquidation, you will get return not even your principle $100,000 , but ( (Principle$100,000) minus (Negative Yields @ -0.05) Times ( 10 Years ) ) assume the rates are on simple annual rate.

Now anyone may wander why should someone going to buy this kind of investment where I am actually giving away not only possible profit also losing some of principle amount!

This might looks real odd, but there is other valid reason for issuing / investing on such kind of bond.

From investor prospective: Every asset has its own 'expense' for keeping ownership of it. This is also true for money/currency depending on its size. And other investment possibility and risk factor. The same way people maintain checking account with virtually no visible income vs. Savings account where bank issue some positive rate of interest with various time factor like annually/half-yearly/monthly. People with lower level of income but steady on flow choose savings where business personals go for checking one. Think of Millions of Ideal money with no secure investment opportunity have to option in real. Option one to keeping this large amount of money in hand, arranging all kind of security which involve extra expense, risk and headache where Option two is invest on bond issued by Government of country. Owner of that amount will go for second one even with negative yields on bonds where he is paying in return of security and risk free grantee of getting it back on time.

On Issuing Government prospective: Here government actually want people not to keep money idle investing bonds, but find any possible sector to invest which might profitable for both Investor + Grater Community ultimately country.

This is a basic understanding on issue/buy/selling of Negative interest bearing bond on market.

Hope I could explain it here. Not to mention, English is not my 1st language at all. So ignore my typo, grammatical error and welcome to fix it.

Cheers!

• I have one comment on your terminology - you say "you are not even getting 100k, but actually 100k less the .05%/year". This is incorrect. For the bond listed in the OP, you pay $100,501, to get$100,000 back at the end of the term. This mirrors how 'normally' (with positive interest rates), you would pay something like 95,000 to get back 100,000 at the end of the term. The remainder of your answer is generally correct, but does not directly answer the question asked by the OP, which was about terminology. – Grade 'Eh' Bacon Aug 30 '16 at 14:03