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Difficulty: HardPublic Debt Types and Management

A government issues 91-day Treasury bills to cover an immediate deficiency in recurrent expenditure, while concurrently making systematic annual deposits into a dedicated reserve to redeem a 20-year bond issue at maturity. How are these two public debt instruments classified respectively?

  1. Floating debt and funded debtAnswer
  2. B
    Reproductive debt and deadweight debt
  3. C
    Funded debt and floating debt
  4. D
    External debt and internal debt

Answer

The short-term Treasury bill obligation is classified as floating debt, while the long-term bond issue backed by a dedicated redemption fund is classified as funded debt.
Public debt is categorized by tenure and repayment arrangements. Floating (unfunded) debt consists of short-term obligations like Treasury bills issued to meet temporary revenue gaps. Funded debt comprises long-term obligations for which a dedicated fund (such as a sinking fund) is systematically created to pay off the principal upon maturity. Therefore, the short-term Treasury bill is floating debt and the 20-year bond with annual redemption deposits is funded debt.

Step-by-Step Solution

1
Analyze the first debt instrument (91-day Treasury bills used for short-term deficit spending).
Identify that short-term debt maturing within a year without a permanent provision for redemption is floating (unfunded) debt.
Floating debt provides temporary liquidity to bridge budget gaps.
2
Analyze the second debt instrument (20-year bond backed by systematic annual deposits into a dedicated reserve).
Identify that long-term debt tied to a dedicated redemption fund (sinking fund) is funded debt.
Funded debt has a long duration and explicit financial mechanisms established for its gradual debt retirement.
3
Match both classifications sequentially.
The correct classification pair is floating debt and funded debt.
The sequence must reflect the short-term instrument first and the long-term sinking fund instrument second.

Key Concept

Classification of Public Debt by Maturity and Redemption Mechanism (Floating vs. Funded Debt)
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Topics

Public Debt Types and Management

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