Chapter 6, Problem 24AA

To determine

To evaluate: The way in which buying a U.S. savings bonds increase the U.S. government's debt.

Explanation of Solution

A U.S. savings bond is a particular type of government bond, is a government issued bond to raise public funds for the financing of its capital projects and other activities that are necessary for economic management. When the government issues bond it actually takes out a loan from the public that it accepts to a fixed date for future repayment.

These bonds cater to many as they are not liable to local or state income taxes. These bonds are not easy to transfer and are non-negotiable.

So, as a compensation for providing capital, government has to make interest payment to its bondholders.

Economics Concept Introduction

Introduction: A U.S. savings bond is a bond of government which is sold to the citizens to help fund federal spending, and offering a fixed, though small, return to savers. Such bonds are sold at a discount with zero coupons, with a fixed implicit interest rate for a period of time that is fixed.