Debt Management: Concept
Principles of Debt Management
- The interest cost of debt-servicing should be minimized as far as possible;
- The need of the investors of different nature should be satisfied;
- The objectives of economic stability and growth should be achieved; and
- There should be minimization of the need to enter the market in a situation of inconveniency.
Debt Redemption Methods
- Refunding- In this method government repays the debt to the existing holders by raising the debt from new security holders. Government will have the liability to pay the debt to the new security holders instead of the earlier holders.
- Conversion- At the time of maturity, when the market rate of interest is lower than the existing rate of interest on the securities, the old loans are converted into the new loans, if the security holders agree.
- Sinking fund- It is a fund where certain amount of revenue is deposited each year for the repayment of the outstanding debt. The balance in the fund can be invested, and the interest or other income from them is also accumulated in the fund until the debt is matured.
- Buying up loans- In a situation when government can generate budgetary surplus, mostly in a situation of prosperity, the surplus is used to clear the debt off gradually. It used to be practiced in case of the Console.
- Capital Levy- This method uses heavy taxes on property and income above certain value as the speculators and other business groups enjoy a huge profit mainly after the war.
- Serial Bond Redemption- This is the most common method of debt redemption. Government issues the securities maturing at different periods. The maturing securities are determined in a serial order by lottery or fixing certain maturity dates. The maturing securities are repaid with making budgetary provisions every year.