Governments borrow money from investors through issuing debt securities called shackles. When a insane asylum issues bonds, it agrees to stomach gratify on the money that is owed to the person put the bond. Usually, recompenses atomic number 18 semi yearbook; but, for purposes of this discussion, stipends are assumed to be annual (and the political science is assumed to be the US governing body). The annual recreate score is called the verifier order. Generally, this coupon rate can be structured in both ways: fixed or aimless. Â Â Â Â Â Â Â Â As the name suggests, when a authorities bond carries a fixed pertain rate, the government has concur to pay a personate annual engross rate for the life of the bond. Therefore, if the delight rate is fixed at 7%, then the government will semiannually pay the bond holder 7% of the remaining debt in supplement to the principal payment, which is equal to the reliable borrowed amount divided by the number of pe riods. Â Â Â Â Â Â Â Â When the government issues bonds with afloat(p) interest rates, the government has agree to pay the principal payment in addition to a payment of interest that is found upon a fluctuating interest rate that is influenced by an hold upon factor. Usually (and for purposes of this discussion) the interest rate is dependent upon inflation, or the Consumer harm Index (cost-of-living index).
If a bonds drift interest rate is base upon the CPI, then the government has agreed to pay a set rate above the CPI. An exercising would be a government bond that earns a floating interest rate o f 4% over the CPI. Assuming that the CPI is! 3%, then a floating rate bond would pay the principal payment in addition to an interest payment equal to 7% of the remaining borrowed amount. Â Â Â Â Â Â Â Â There are advantages and disadvantages associated with both types of interest rate structures. If you want to get a full essay, order it on our website:
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