A few years ago, in some countries with zero or negative inflation, governments issued debt instruments with negative nominal yields. Some analysists have been very surprised by the negative yields. Here is a comment: Negative yields change fundamentally the equation for buying bonds. The notion that yields are

floored at $0\%$ has been broken once and for all. Previously, investors assumed bond prices couldn$$t go above a level equivalent to a $0\%$ yield.

$1.$ Nominal versus real yields.

$($a$)$ Is nominal yield the relevant variable to be studied and compared to the historical evidence, from the point of view investors? If not, should we study real yields instead? Explain briefly $[$Hint: do investors care about nominal or real yields?$].$

$($b$)$ Are negative nominal yields in countries with zero or negative inflation a fundamentally new fact,when compared to the historical evidence analyzed in class about real yields?

$2.$ Consider an investor with a lot of cash $($e$.$g$.,50$ million euro$).$ She wants to invest in the safest asset available. Explain why she might prefer to purchase government bonds with a negative nominal yield rather than deposit her money in a zero$-$fee bank account that pays a zero nominal yield.