By Matthew Kerkhoff
Borrowers pay interest to lenders for the use of their capital. At least that’s how it’s supposed to work. One of the most fundamental concepts in finance is the time value of money. That is the idea that a dollar today is worth more than a dollar tomorrow; consumption today is valued more than in the distant, uncertain future.
Time value of money is applied everywhere in finance, including predominant valuation models which “discount” future earnings streams to their present day value. When money can earn interest over time, it’s natural that money is worth more the sooner it is received.
But recent action in the bond markets is turning this concept on its head. Instead of borrowers paying interest to lenders, lenders are starting to pay interest to borrowers. “Here, take this money, I’ll pay you to hold on to it for awhile.”
Sound absurd? It should, because that’s very ... Log in or subscribe to continue reading.