Analysing and Interpreting the Yield Curve, 2nd Edition

CHAPTER 9Negative Interest Rate Analytics¹

In this chapter, we consider the issues arising in a comparison of negative with positive interest rates, principally with respect to discount factors, the yield to maturity, and different compounding schemes. This is an area of practical concern for banks in the post‐2008 era, given that negative interest rates have become almost a “norm” in the eurozone and also in, for example, the German and Swiss government bond markets. With respect to the orthodox discipline of bank asset‐liability management (ALM) therefore, it is necessary for cash managers to be aware of the specific issues surrounding a negative interest yield curve.

THE DISCOUNT FACTOR

Discount factors translate money through time and for positive interest rates the value of money is worth more today than in the future. Orthodox financial analysis assumes interest rates always to be positive. In the current market environment, however, interest rates in a number of jurisdictions are close to zero and are even negative. In this section, we discuss the domain of definition of discount factors and start with the definition.

Definition: The discount factor function (DK), or for short the discount factor with a discount rate function at an arbitrary time point measured in the ...