Posts Tagged 'debt'

Bonds in Plain English

Last Tuesday, the Irish government borrowed another €1.5bn. You may have heard a lot about bonds in the news early this week. So what are bonds and why are they important to Ireland?

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?

Give your reasons by commenting on this post.


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