Question

What is meant by funded and unfunded debts?

Answer 1

Funded debt is, in fact, a long-term debt, exceeding the duration of at least a year. It comprises of securities which are marketable in the stock exchange. Funded debt in its proper sense is, however, an obligation to pay a fixed sum of interest, subject to an option of the government to repay the principal. In such debts, the creditor bond-holder has no right to anything except the interest.

Unfunded debt, on the other hand, are for a comparatively short duration. They are generally redeemable within a year. Unfunded debts are, thus, incurred always in anticipation of public revenue, a temporary measure to meet current needs.