Explanation:
A negative short-term rate does not make much economical sense because people would never lend money at a negative rate when they can at least hold cash and earn a zero rate instead. Note the term "individuals" in the question. Some central banks or governments might lend at negative rates in some special circumstances. In some cases, the government can also force banks to lend at negative rates.
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Q.1652 Term structure models in which the terminal distribution of interest rates has a normal distribution are commonly known as Gaussian or normal models. The limitation of these models is that the short-term rate can become negative. Which of the following statements is true?
A
Negative short-term interest rate are very attractive for lenders because lenders will have zero lending risk.
B
In most cases, individuals will never lend money at negative rates; they would rather hold it and earn a zero rate.
C
Individuals will lend money at negative rates to help the borrowers in tough situations and boost the economy.
D
Negative short-term rates can neither affect borrowers nor lenders because, in the long-term, the rates become positive.
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