Question

Mention any three methods of redemption of public debt.

Mention any two methods for redemption of public debt.

Explain four methods of public debt redemption.

Discuss any two methods of redemption of public debt in an economy.

Mention any four methods of debt redemption.

Discuss two methods of Redemption of public debt in an economy.

Answer 1

Methods of Redemption of Public Debt: The process of repaying a public debt is called redemption. The government sells securities to the public, and at the time of maturity, the person who holds the security surrenders it to the government. The following methods are adopted for debt redemption.

1. Repudiation of Debt: Repudiation is the government’s reluctance to repay a debt. The government does not acknowledge its responsibilities to repay the loan when it repudiates public debt. Due to financial limitations, it declines to pay both the principal and interest on the obligation. The government typically dislikes repudiating its debt because it erodes public trust and is viewed as unethical and dishonest.
2. Refunding: The process by which the government issues new bonds to settle maturing bonds. As a result, the government takes out a new loan to pay back an existing one. In this instance, the debt’s financial burden is deferred rather than liquidated. As a result, the overall debt load continues to grow. This approach is typically used when the government is temporarily unable to fulfill its outstanding debts.
3. Debt Conversion: Converting public debt entails exchanging existing debt for new debt. Although the loan is not repaid through this method, the debt is altered. Converting a high-interest debt to a low-interest debt is the process of conversion. It’s possible that the government took out a loan while interest rates were high. However, it might turn an old high-interest loan into a new low-interest loan if the market interest rate declines.
4. Budgetary Surplus: The government occasionally manages to create a budget surplus. It can settle its debt to the populace with this budget surplus. A yearly surplus budget policy may be used to progressively pay off the nation’s debt. The government may buy back its own bonds and securities from the market with the money left over from the budget.
5. Terminal Annuities: With this approach, the government makes equal yearly payments on its debt, covering both the principal and interest. Annuities are the yearly payments. The burden of debt is lessened annually, but the government is not obligated to pay back all of the debt at once. Thus, it is the process of repaying loans in installments. Every year, the debt load decreases, and by the time it matures, it has already been paid off in full.