Debate House Prices
In order to help keep the Forum a useful, safe and friendly place for our users, discussions around non MoneySaving matters are no longer permitted. This includes wider debates about general house prices, the economy and politics. As a result, we have taken the decision to keep this board permanently closed, but it remains viewable for users who may find some useful information in it. Thank you for your understanding.
We'd like to remind Forumites to please avoid political debate on the Forum. This is to keep it a safe and useful space for MoneySaving discussions. Threads that are - or become - political in nature may be removed in line with the Forum’s rules. Thank you for your understanding.
A Quick Thought on Low Interest Rates
Generali
Posts: 36,411 Forumite
As I'm sure you all understand, the value of fixed rate debt (most debt and debt-type obligations such as pensions and health care is fixed rate) is negatively correlated with interest rates. In English that means that as interest rates fall, the value of the debt increases and as interest rates rise the value of the debt falls.
The reason for that is pretty obvious. If a perpetual bond pays 5% and interest rates are 2.5% then I'll pay $200 for that income stream. If interest rates are 10% then I'll only pay $50.
In that case if the problem is too much debt, why are lower interest rates that increase the value of the debt the solution?
Just wondering.
The reason for that is pretty obvious. If a perpetual bond pays 5% and interest rates are 2.5% then I'll pay $200 for that income stream. If interest rates are 10% then I'll only pay $50.
In that case if the problem is too much debt, why are lower interest rates that increase the value of the debt the solution?
Just wondering.
0
Comments
-
As I'm sure you all understand, the value of fixed rate debt (most debt and debt-type obligations such as pensions and health care is fixed rate) is negatively correlated with interest rates. In English that means that as interest rates fall, the value of the debt increases and as interest rates rise the value of the debt falls.
The reason for that is pretty obvious. If a perpetual bond pays 5% and interest rates are 2.5% then I'll pay $200 for that income stream. If interest rates are 10% then I'll only pay $50.
In that case if the problem is too much debt, why are lower interest rates that increase the value of the debt the solution?
Just wondering.
But is that the problem they're trying to solve? A cynic might think they were/are trying to achieve the opposite by expanding private debt to counter a contraction in state spending.0 -
The state debt is not thought of in terms of a future income stream, only as a current capital figure so lower interest rates reduce the anticipated interest bill.0
-
Low interest rates impact in different ways.
Low rates for states means lower repayment costs, but without inflation make it harder to eventually pay off. Ten year bonds from the start of the crisis will be falling due soon, then the lack of inflation will tell for governments.
Government debt has always gone up over time, the exponential rate it could climb at now to pay off past debts, will be one to watch..._0 -
Oh goody, a Zombie thread.
Presumably you can be completely insolvent (never able to pay back your borrowings) but as long as you are liquid (able to pay the interest) then everyone can pretend and extend. So keep rates low and we can ignore the elephant in the room (solvency) and merely notice that the debt is not 'non-performing.
As evidence for this theory see Japan and Greece.
Is this the old illiquid vs insolvent argument?I think....0 -
As I'm sure you all understand, the value of fixed rate debt (most debt and debt-type obligations such as pensions and health care is fixed rate) is negatively correlated with interest rates. In English that means that as interest rates fall, the value of the debt increases and as interest rates rise the value of the debt falls.
The reason for that is pretty obvious. If a perpetual bond pays 5% and interest rates are 2.5% then I'll pay $200 for that income stream. If interest rates are 10% then I'll only pay $50.
In that case if the problem is too much debt, why are lower interest rates that increase the value of the debt the solution?
Just wondering.
The debt is also a credit
Not many perpetual bonds exist most debt is priced in months or a few years.
Also as you hold the bonds and they get closer to redemption the value gets clsoer and closer to the face value
Given a fixed repayment if interest rates fall then bonds can be paid off quicker0 -
The debt is also a credit
Not many perpetual bonds exist most debt is priced in months or a few years.
Also as you hold the bonds and they get closer to redemption the value gets clsoer and closer to the face value
Given a fixed repayment if interest rates fall then bonds can be paid off quicker
I use perpetuals rather than getting in to the complexities of bond maths.
Interesting to see that the French Government has sold a tranche of 50 year bonds, effectively perpetuals, at less than 2% gross yield.0 -
I use perpetuals rather than getting in to the complexities of bond maths.
Interesting to see that the French Government has sold a tranche of 50 year bonds, effectively perpetuals, at less than 2% gross yield.
Pretty 'uninteresting' for those with defined contribution pensions
I think....0 -
-
Pretty 'uninteresting' for those with defined contribution pensions
you need to use that cheap money to build a huge property empire
and to console yourself that the state will easily be able to fund higher state and public sector pensions via cheap borrowing; or of course use freedom of movement to live in France.0
This discussion has been closed.
Confirm your email address to Create Threads and Reply
Categories
- All Categories
- 347.8K Banking & Borrowing
- 251.9K Reduce Debt & Boost Income
- 452.2K Spending & Discounts
- 240.2K Work, Benefits & Business
- 616.4K Mortgages, Homes & Bills
- 175.4K Life & Family
- 253.5K Travel & Transport
- 1.5M Hobbies & Leisure
- 16K Discuss & Feedback
- 15.1K Coronavirus Support Boards