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Question

Difficulty: MediumPublic Debt Types and Management

Which method of public debt redemption involves setting aside a portion of government revenue into a dedicated reserve account annually to repay a maturing long-term obligation?

  1. Sinking fundAnswer
  2. B
    Debt conversion
  3. C
    Debt repudiation
  4. D
    Debt refinancing

Answer

The correct option is the one specifying a sinking fund.
Establishing a sinking fund allows a government to make regular budgetary allocations into a designated reserve over the life of a loan. When the debt reaches maturity, the accumulated capital in the sinking fund is used to liquidate the principal sum fully.

Step-by-Step Solution

1
Identify the primary mechanism of debt redemption described in the scenario
The scenario describes setting aside revenue periodically into a special account to meet future debt repayment.
Governments use dedicated reserve accounts to reduce the lump-sum burden of redeeming long-term public debts when they mature.
2
Differentiate a sinking fund from other public debt management tools
A sinking fund systematically accumulates funds, unlike conversion (swapping instruments), refinancing (taking new debt), or repudiation (canceling debt).
This confirms that the option identifying the sinking fund accurately captures the annual reserve accumulation process.

Key Concept

Sinking fund mechanism for public debt redemption
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Topics

Public Debt Types and Management

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