Governments borrow money from investors through issuing debt securities called stick withs. When a institution issues bonds, it agrees to hire gratify on the money that is owed to the person assign the bond. Usually, recompenses argon 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 yard. Generally, this coupon rate can be structured in 2 ways: fixed or aimless. Â Â Â Â Â Â Â Â As the name suggests, when a government bond carries a fixed bet rate, the government has concur to pay a personate annual pursuance rate for the life of the bond. Therefore, if the use up rate is fixed at 7%, then the government will semiannually pay the bond holder 7% of the remaining debt in appendix to the principal payment, which is equal to the reliable borrowed amount divided by the number of periods. Â Â Â Â Â Â Â Â When the government issues bonds with afloat(p) interest rates, the government has concord 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 concur upon factor. Usually (and for purposes of this discussion) the interest rate is dependent upon inflation, or the Consumer harm Index ( consumer price index).
If a bonds aimless interest rate is base upon the CPI, then the government has agreed to pay a set rate above the CPI. An precedent would be a government bond that earns a floating interest rate of 4% over the CPI. Assuming that the CPI is 3%, then a fl! oating 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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