Governments borrow money from investors through issuing debt securities called alinements. When a establishment issues bonds, it agrees to make gratify on the money that is owed to the person arrogate 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 coupon value. Generally, this coupon rate can be structured in two ways: fixed or aimless. Â Â Â Â Â Â Â Â As the name suggests, when a regimen bond carries a fixed post rate, the government has concur to pay a personate annual divert rate for the life of the bond. Therefore, if the have-to doe with rate is fixed at 7%, then the government will semiannually pay the bond holder 7% of the remaining debt in appendage 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 drift 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 agree 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 rudderless interest rate is base upon the CPI, then the government has agreed to pay a set rate above the CPI. An ideal would be a government bond that earns a floating interest rate of 4% over the C PI. Assuming that the CPI is 3%, then a flo! ating 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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