Q.Explain the Sinking Fund method and the Conversion method of redeeming public debt.

These are two of the standard methods by which a government eventually repays or reduces the burden of its debt.

Sinking Fund: the government sets aside a fixed sum of money every year into a separate fund, specifically earmarked for eventually repaying a loan. Over the years, this fund grows through the regular annual contributions plus the interest the fund itself earns, until — by the time the loan matures — the fund has accumulated enough to repay the debt in full, in one go, without straining the budget of that particular year.

Conversion: when a government has an old loan carrying a relatively high rate of interest, and market interest rates have since fallen, it can raise a NEW loan at the lower prevailing interest rate and use the proceeds to pay off the old, more expensive loan. This does not reduce the principal amount owed immediately, but it reduces the government's ongoing interest burden going forward, freeing up budgetary resources for other uses. …

Confusing Conversion with Repudiation — Conversion still fully honours the debt (just restructures its interest rate), while Repudiation is an outright refusal to re …