Summative Assessment 1: Essay (40%)

 

Learning Outcomes Assessed

1.1.           To develop knowledge and understanding of the main aspects of fxed income securities and their analysis from a theoretical and practical perspective

1.2.           To develop an understanding of types of risk that are associated with investments in fxed income securities and to be able to critically assess the factors that infuence that risk

1.4.           To develop the ability to interpret observed interest rates in the context of theories of interest rates and to be able to critically evaluate the implication of relevant theories from a practical perspective

1.6.           To develop intellectual skills that enable rigorous and logical problem solving abilities through consideration of problems related to fxed income analysis

1.7.           To be able to conduct a critical discussion about practical and theoretical aspects of fxed income analysis

 

Most of us are probably used to the notion that interest rates are usually positive and it is uncommon to face negative nominal interest rates. While true in general, it does happen to be the case that from time to time the level of short term rates goes below zero.

 

You are also expected to refer to additional sources and articles that are related to the topic of negative interest rates.

 

We would like you to write an essay in which you discuss negative interest rates, their implications and consequences in the light of various theories of interest rates and from a practical perspective. Specifcally, please address in your essay the following topics and questions:

 

  1. Explain intuitively what it means when interest rates are negative and describe specifc examples of countries that have experienced interest rates below zero.
  2. Discuss how different theories of interest rates help us to explain the negative sign on interest rates and describe the theoretical implications of such rates for the future.
  3. Describe broadly the consequences of interest rates being negative from a practical perspective for various market participants, such as: governments, companies, fnancial institutions, institutional and individual investors. Consider also the both negative and positive aspects of this situation.
  4. Imagine that negative short term rates are persistent in economy for a period of time longer than two to three years. Describe how, in your opinion, this situation could infuence the investment decisions of small individual investors.

 

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