Why would I buy a bond with a negative yield?
It would be preferable to purchase a bond with a negative yield if the negative yield was the smallest compared to similar financial securities. The purchase or sale of a security is rarely a mutually exclusive event.  An individual may have personal reasons or a desire to contribute to the activity the bond is financing.  To an entity, the negative yield bond may be part of a cost averaging plan, diversification strategy, a single leg of a multi-leg transaction, or possibly to aid certainty as a hedge in a pairs trade.  And of course there may be other unique situations specific to the entity. Said another way, is the Queen of Spades a good card?  It depends on the game being played and what is in your hand. Perhaps something else comes with the bond so it is a convertible security. Buffett's Negative-Interest Issues Sell Well from 2002 would be an example from more than a decade ago: Warren E. Buffett's new negative-interest bonds sold rapidly   yesterday, even after the size of the offering was increased to $400   million from $250 million, with a possible offering of another $100   million to cover overallotments. The new Berkshire Hathaway securities, which were underwritten by   Goldman, Sachs at the suggestion of Mr. Buffett, Berkshire's chairman   and chief executive, pay 3 percent annual interest. But they are   coupled with five-year warrants to buy Berkshire stock at $89,585, a   15 percent premium to Berkshire's stock price Tuesday of $77,900. To   maintain the warrant, an investor is required to pay 3.75 percent each   year. That provides a net negative rate of 0.75 percent. The question in my view is going into Opinion and economics. Why would I buy a bond with a negative yield? I guess you have answered yourself; Although the second point is more relevant for high net worth individual or large financial institutions / Governments where preserving cash is an important consideration. Currently quite a few Govt Bonds are in negative as most Govt want to encourage spending in an effort to revive economy.
"leverage amplifies gains and losses, when returns are positive leverage makes them more positive, but when returns are negative leverage makes them more negative. since most investments have a positive return in ""the long run"", leverage is generally considered a good idea for long term illiquid investments like real estate.  that said, to quote keynes: in the long run we are all dead. in the case of real estate specifically, negative returns generally happen when house prices drop. assuming you have no intention of ever selling the properties, you can still end up with negative returns if rents fall, mortgage rates increase or tax rates rise (all of which tend to correlate with falling property values). also, if cash flow becomes negative, you may be forced to sell during a down market, thereby amplifying the loss.  besides loss scenarios, leverage can turn a small gain into a loss because leverage has a price (interest) that is subtracted from any amplified gains (and added to any amplified losses). to give a specific example: if you realize a 0.1% gain on x$ when unleveraged, you could end up with a 17% loss if leveraged 90% at 2% interest. (gains-interest)/investment=(0.001*x-0.02*0.9*x)/(x/10)=-0.017*10=-0.17=17% loss one reason leveraged investments are popular (particularly with real estate), is that the investor can file bankruptcy to ""erase"" a large negative net worth.  this means the down side of a leveraged investment is limited for the highly leveraged investor. this leads to a ""get rich or start over"" mentality common among the self-made millionaire (and failed entrepreneurs).  unfortunately, this dynamic also leads to serious problems for the banking sector in the event of a large nation-wide devaluation of real estate prices." "Even though the article doesn't actually use the word ""discount"", I think the corresponding word you are looking for is ""premium"". The words are used quite frequently even outside of the context of negative rates. In general, bonds are issued with coupons close to the prevailing level of interest rates, i.e. their price is close to par (100 dollar price). Suppose yields go up the next day, then the price moves inversely to yields, and that bond will now trade at a ""discount to par"" (less than 100 dollar price). And vice versa, if yields went down, prices go up, and the bond is now at a ""premium to par"" (greater than 100 dollar price)" Those are the expected yields; they are not guaranteed. This was actually the bread and butter of Graham Newman, mispriced bonds.  Graham's writings in the Buffett recommended edition of Securities Analysis are invaluable to bond valuation. The highest yielder now is a private subsidiary of Société Générale.  A lack of financial statements availability and the fact that this is the US derivatives markets subsidiary are probably the cause of the higher rates. The cost is about a million USD to buy them. The rest will be similar cases, but Graham's approach could find a diamond; however, bonds are big ticket items, so one should expect to pay many hundreds of thousands of USD per trade. "It makes sense if the NPV is positive. But what rate should you use at determining the NPV? A textbook might say ""market rate"".... and by definition the market rate to use in bond calculations like yours will mean that your NPV will be zero.  How can this be? Well it's a bit of a circular definition. You take less capital to earn a higher return. The value of your capital spread over the period of the bond's maturity is the net difference... but the money in your pocket from selling the bond and not purchasing also has value. Banks and traders do this exact swap every day, many many times. The rate at which you can execute this swap is what defines the market rate. Therefore, by definition, the NPV will be zero. Now, this doesn't mean it's a bad idea for you. You can, on your own accord, decide the value you place on the capital versus the yield and make the decision. Do you expect rates to rise or fall? Do you expect higher or lower inflation? In reality you can form whatever opinion you like for your own circumstance, but the market is the net aggregation of formative opinion. You only get to decide whether or not you agree with the market." There are a few other factors possible here: Taxes - Something you don't mention is what are the tax rates on each of those choices.  If the 4% gain is taxed at 33% while the 3% government bond is taxed at 0% then it may well make more sense to have the government bond that makes more money after taxes. Potential changes in rates - Could that 4% rate change at any time?  Yield curves are an idea here to consider where at times they can become inverted where short-term bonds yield more than long-term bonds due to expectations about rates.  Some banks may advertise a special rate for a limited time to try to get more deposits and then change the rate later.  Beware the fine print. Could the bond have some kind of extra feature on it?  For example, in the US there are bonds known as TIPS that while the interest rate may be low, there is a principal adjustment that comes as part of the inflation adjustment that is part how the security is structured. Virtually zero risk of default; safety; diversification; guaranteed fixed income albeit very low; portfolio diversifier so it reduces total volatility; plus yields might drop even lower thus increasing the price of the bond.  Very unlikely given how obscenely low yields already are but still possible.  I thought nobody would ever buy a 10yr @ 3% and now look, rates are almost half as much and those 3% bonds are worth a lot more now on the secondary market.  Timing the bond market is really hard. As well as credit risk there's also interest risk. If a bond has a face value of $100, pays 1% and matures in 20 years' time then you expect to receive a total of $120 from buying it now -- $1 per year for 20 years and $100 at the end. But if you can get a 3% return elsewhere, then if you invest your $80 there instead you will get $2.40 per year for 20 years and then $80 at the end, making a total of $128 (and you also get more of the money sooner). So even $80 for the $100 bond is a bad buy, and you should invest elsewhere. You're talking about floating rate loans. It's so that the bond is marked back to market every 90 days. Any more often would be a hassle to deal with for everyone involved, any less often and they would be significant variance from LIBOR vs. the loan's specific rate. Long-term bonds -- any bonds, really -- can be risky for two main reasons:  return on principal, or return of principal.  The former is a problem if interest rates are low (which they are now in the US) because existing bonds will fall in price if interest rates rise.  The second is a problem if the lender defaults: IOU nothing. No investment is riskless.  Short-term bonds command a lower interest rate than long-term bonds (usually) because of their quicker maturity, but short-term bonds carry risk just like long-term bonds (though the interest rate risk is lower, sometimes quite a bit lower, than for long-term bonds). Ponder this. Suppose that a reputable company or government were to come out and say hey, we are going to issue some 10 year bonds at 6.4%. Anyone interested in buying some? Assume that the company or government is financially solid and there is zero chance that they will go bankrupt. Think those bonds would sell? Would you be interested in buying such a bond? Well, I would wager that these bonds would sell like hotcakes, despite the fact that the long term stock market return beats it by a half percent. Heck, vanguard's junk bond fund is hot right now. It only yields 4.9% and those are junk bonds, not rock solid companies (see vanguard high yield corporate bond fund) Every time you make an extra principal payment on your student loan, you are effectively purchasing a investment with a rock solid, guaranteed 6.4% return for 10 years (or whatever time you have left on the loan if make no extra payments). On top of that, paying off a loan early builds your credit reputation, improves your monthly cash flow once the loan is paid, may increase your purchasing power for a house or car, and if nothing else, it frees you from being a slave to that debt payment every month.  Edit Improved wording based on Ross's comment This is a perfect example of why bonds are confusing at first glance.  Think about it this way...  You buy a 30-year Russian Bond at 4%.  An event happens that makes Russia risky to invest in.  You want to buy another bond but fuck 4%, you and the rest of the market want 6% to compensate you for the risk.  Now let's say you want to sell your 4% bond... Well you're going to have to drop the price of that bond in order for it to appeal to an investor that could go out and get a 6%. On a 30-year bond of that kind, you're looking at about 75% of what you bought it for.   So to wrap it up, high bond yields are great for buyers that don't already own them, but bad for sellers who want to get rid of their old ones. It is the opposite intuition as stocks and almost everything else. Negative coupons are not the same as a negative yield. A $1000 bond that you purchase, at a premium, for $2100 that produces 10 annual coupons of $100 and a redemption of $1000 has a real, positive coupon ($100). The holder of the bond gets this coupon, and the maturity value However, you get back less than your initial investment.  There is no growth; the original investment shrinks, or has a negative growth rate.  Most mortgage or bond calculators choke on this situation... From my blog's discussion on 2017 tax rates.  This is the final set of numbers. So, if you currently have, say $120K taxable income, every dollar above that starts getting taxed at 25%, until $153K, then 28%.  In other words, forecast your taxes based on the day job, but then the 1099 goes on top of that. The fact that the option is deep in the money will be reflected in the market price of the option so you can just sell it at a profit. If there's a (n almost) guaranteed profit to be had, however, you can always find someone who will lend you the money to cover the exercise... they'll charge you interest, however!