Negative Carry

Posted in Finance, Accounting and Economics Terms, Total Reads: 758

Definition: Negative Carry

Negative carry is a concept where the returns on an investment is lesser than the cost of the funds itself. In this scenario, the investment is not profitable and hence not desirable for an investor.

For e.g. If Danny borrows $1000 at 12.5% interest and invests it in a bond. He believes that the bond would yield returns that will cover the interest expense. But the face value of the bond drops and the average interest rate from the bond becomes lower than the interest rate that he is paying for the loan. Suppose if the bond yields 9.5% at the end of first year, then he would have to pay the remaining 3% (12.5%-9.5%) out of his own pocket.

Negative carry should be avoided by investors as the capital gains would not justify the loans as they would not make decent profits.

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