Public debt and debt management

Question 1

PUBLIC DEBT

Answer 1

The sum of all the outstanding financial liabilities of the public sector in respect of which there is a primary legal responsibility to repay the original amount borrowed (the principal of debt) and to pay interest (debt servicing)

Question 2

Treasury bills

Answer 2

Normally issued for a 91-day period

Short term borrowing ( can also be bank overdrafts for bridging finance)

Question 3

Government bonds

Answer 3

Are fixed-interest bearing securities issued by the national government that represents a charge on the revenues and assets of the government.

Maturities of more than three years

Question 4

Variable-interest bonds

Answer 4

Example is inflation-indexed bonds

Question 5

Zero-coupon bonds

Answer 5

Do not pay interest during bond lifetimes
investors buy zero-coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it matures or becomes due.

Question 6

DEBT SUSTAINABILITY

Answer 6

When the borrower is expected to be able to
continue servicing its debts without an unrealistically large correction to the balance of
income and expenditure

Question 7

CURRENT EXPENDITURE (CONSUMPTION EXPENDITURE)

Answer 7

refers to the spending on goods and services, that are usually used up within a specified, usually short period

These goods are normally associated with tax financing rather than debt financing

Question 8

CAPITAL EXPENDITURE

Answer 8

refers to expenditure on durable items that yield services or revenue over a long period.

Examples include: 
o roads 
o school buildings 
o hospitals 
o electricity networks 
o irrigation dams

Question 9

INTER-TEMPORAL BURDEN OF PUBLIC DEBT

Answer 9

Shifting of the burden burden of the public debt from one generation to the next over time

Question 10

BURDEN OF DEBT

Answer 10

responsibility for the actual payment of the

principle and interest

Question 11

Domestic (internal debt)

Answer 11

the debt incurred by government when

borrowing from domestic residence or institutions

Question 12

Foreign (external debt)

Answer 12

debt incurred by government when borrowing

from foreign government, residents or institutions.

Question 13

Allocation (efficiency)

Answer 13

Not all taxes are efficient (this is the amount of excess burden created)

The choice between tax and debt on efficiency grounds depends on type of tax used (relative excess burdens)

Question 14

Distribution (equity)

Answer 14

debt finance constitutes the one method whereby more than one generation could contribute to the financing cost of activities
that confer an inter-generational benefit

Ricardian equivalence theory

Question 15

Ricardian equivalence theory

Answer 15

government should not concern itself with inter-generational equity, since society will voluntarily affect this equity.