Public debt - What is it? types, and examples

Public debt

Financial obligation contracted by the State.

What is public debt?

Public debt is a financial obligation contracted by the State, therefore, these include the entire set of debts corresponding to the municipal, regional and national administration and are contracted in order to solve certain situations in which liquidity is lacking.

Countries usually contract debts when their financial resources are not capable of meeting the cost of carrying out one or more projects. Stated differently, if a State presents a public deficit, that is, in a given time interval it spends more than it earns, the public debt increases, and conversely, a public surplus is presented.

Types of public debt

The main types of public debt are listed below:

• Treasury Bills– Referred to as fixed income securities, these assets are uniquely represented by book entry. They are highly recommended when you want to support investment in the short or medium-term since they are issued for six or twelve months.
• State Bonds: those titles issued by the State in order to support investment, these work in such a way that, when issued, a certain amount of money is lent to the State in exchange for a yield or a previously agreed interest rate. . It is usually a medium-term option.
• State Obligations: those securities issued by the State in order to support an investment differ from State bonds, since their term is longer, making them long-term investments, comprised of 10, 15, or even 30 years. It is these obligations, the borrowed amount will generate interest that will later be granted.

Examples of public debt

Here are some examples of public debt:

• The State wishes to finance the opening of a new recreational park, however, it does not have sufficient resources to meet this need, therefore, it decides to issue 25 treasury bills that have a unit value of 10 million pesos. The individuals interested in the investment make the purchase and after 6 months the State will pay them the amount invested and 5% interest equivalent to 500,000 pesos. In conclusion, in that period of time, the State must assume 10,500,000 of its public debt.
• The State issues 50 debt bonds with the purpose of supporting a project related to public infrastructure, each bond has a value of $15,000 at 6 years with an annual coupon of 5.8% in interest. The individuals interested in the investment make the purchase of the bonds, therefore, the State contracts a financial obligation and must attach it to its public debt during the 6-year period. In conclusion, in this period of time, investors will earn 5.8% of their investment annually and at the end of this interval, their 15,000 will be returned to them.

 

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