Question

Discuss the following methods of debt redemption:
Debt conversion

Answer 1

Conversion of debt:

Conversion of public debt implies changing the existing loans, before maturity, into new loans at an advantage in servicing charges. In fact, the process of conversion consists generally, in converting or altering a public debt from a higher to a lower rate of interest.

A government might have borrowed at a time when the rate of interest was high. Now, when the rate of interest falls, it may convert the old loans into new ones at a lower rate, in order to minimise the burden. Thus, the obvious advantage of such conversion is that it reduces the burden of interest on the tax­payers. Furthermore, lower interest rates on public loans would mean a less unequal distribution of income.