Bonds are used by the government to raise money. The Irish government needs to borrow about €20bn per annum in order to run the country i.e. our total expenditure exceeds our total income by €20,000m.
Each bond is usually sold for €100 and has a fixed rate of interest.
An example would be:
€100 4% April 2014
€100 is the price of the bond. The bond will pay 4% interest per year. This is a fixed rate. In April 2014, the bond “matures” i.e. the government repays the €100 to the investor who bought the bond.
The government is borrowing the €100 until April 2014 and pays 4% interest per year.
The reason why bonds were in the news this week is that Ireland now has to pay a higher interest rate to the people who buy our bonds because they view Ireland as more of a risk i.e. will we be able to pay the interest each year and the €100 in 2014?
This is the same as a bank would do when lending money to a risky customer i.e. charge them a higher interest rate.
Question: Why is Ireland now more of a risk than last year?
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