Floating Vs. Fixed Interest Rates

Governments borrow money from investors through issuing debt securities called stick bys. When a validation issues bonds, it agrees to fee gratify on the money that is owed to the person allot the bond. Usually, recompenses ar 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 esteem. Generally, this coupon rate can be structured in deuce ways: fixed or aimless.         As the name suggests, when a administration bond carries a fixed quest rate, the government has concur to pay a personate annual use up rate for the life of the bond. Therefore, if the involution rate is fixed at 7%, then the government will semiannually pay the bond holder 7% of the remaining debt in profit to the principal payment, which is equal to the reliable borrowed amount divided by the number of periods.          When the government issues bonds with rootless interest rates, the government has hold 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 ( consumer price index). If a bonds float interest rate is base upon the CPI, then the government has agreed to pay a set rate above the CPI. An theoretical account would be a government bond that earns a floating interest rate of 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.         There are advantages and disadvantages associated with both types of interest rate structures. If you want to get a full essay, orde r it on our website: OrderCustomPaper.com

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