Question

4. The following Treasury bond quote appeared in The Wall Street Journal on May 11, 2004:

9.125               May 09            100.09375       100.12500       …         ‐2.15

Why would anyone buy this Treasury bond with a negative yield to maturity? How is this possible?

Answer 1

This is a treasury bond where if you pay 100.125000 so at the maturity you will receive 100, so the yield that you would receive on your investment would be negative yield. In real world scenario, some countries have seen negative interest rate scenario and in Europe some countries treasury bonds have negative yields.

Sometimes investors have to accept the negative yield because,

· Investing in a treasury bond with negative yield is still a better option than putting your money in bank when the economy is deteriorating and banks are facing crisis and collapsing.

· If the yield that you received from the bond is -1% but the economic environment is deflationary where the consumer price index falls by more than 2%, your purchasing power will still increase.

· With the fall in interest rate in the market you can have capital gains because of the inverse relationship between the interest rate and bond price.

· Apart from retail investors, some investors are required to invest certain portion of their investment into treasury bonds so they have to invest.