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Negative rates

Negative rates have become frequent and the CNO has been reviewing the situation where the application of coupon calculation formulae results in coupons being negative (the case of FRNs whose terms do not provide a floor).

Along with negative rates, we now see bonds whose yield is negative (the case of zero coupon bonds issued at a premium above par but redeemable at par).

Gilles Endreo here presents a legal analysis of “Negative Rates, Negative Yields and Bond Issues under French Law”.

This study examines the various codes that specifically apply to bonds (such as the Commercial Code and the Monetary and Financial Code) and finds that there is no reference to negative rates or negative yields.

The analysis of both negative coupons and negative yields thus relies ultimately on the provisions of the Civil Code relating to monetary loans. The Civil Code provides that there may not be any lending at a loss, which can be interpreted as an implicit floor at zero.

The data providers apply an implicit floor at 0%.

However, as long as this is clearly provided for, the terms and conditions of a bond may provide for a negative
rate or a negative yield, but the bond issue will no longer be in the nature of a borrowing (it would be a deposit with the deposit holder having the depositor remunerating her for holding the depositor’s money). The tax treatment of such remuneration would differ from that of an interest payment.

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last update 02 June 2020