Negative Interest Rates and the Perpetuity Paradox

Abstract

With 30% of the world's investment grade sovereign bonds trading at sub-zero yields, there is a growing acceptance that negative interest rates are the 'new normal.' Even very low probabilities of sustained negative interest rates in the future leads to incredibly high Expected Values for ultra-long-term bonds. In this paper, we'll explain and offer one solution to what we call the 'Perpetuity Paradox', which provides an extreme example of the care that's needed in deciding how much to invest in an attractive opportunity.

Keywords: negative interest rates, long-term loans, perpetual loans, perpetuity

JEL Classification: B12, B16, B20, C00, C10, C11, C50, C57, C73, D03, D81, D83, E00, G00, G02, G11, G12, G14, G17, G23