Question

Consider the following statements regarding ‘negative yield bonds’ :-

1. These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond.

2. In negative yield bonds, investors pay interest to the borrower to keep their money with them.

3. Negative-yield bonds attract investments during times of stress and uncertainty

Which of the above statements rare correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3​

Answer 1

Option D - 1, 2 and 3

■ Explanation :-

• Last week, China sold negative-yield debt for the first time, and this saw a high demand from investors across Europe. As yields in Europe are even lower, there was a huge demand for the 4-billion-euro bonds issued by China. China’s 5-year bond was priced with a yield of -0.152%, and the 10-year and 15-year securities with positive yields of 0.318% and 0.664%.

• These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond. These are generally issued by central banks or governments, and investors pay interest to the borrower to keep their money with them.

• Negative-yield bonds attract investments during times of stress and uncertainty as investors look to protect their capital from significant erosion.

• The fact that the 10-year and 15-year bonds are offering positive returns is a big attraction at a time when interest rates in Europe have dropped significantly. As against minus -0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between -0.5% and -0.75%.

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