tag:blogger.com,1999:blog-5882645467378797266.post8318985695814693853..comments2023-07-17T11:55:51.363+02:00Comments on ObservingGreece: Would an OSI make sense?kleinguthttp://www.blogger.com/profile/12491174042954678023noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-5882645467378797266.post-56757373159040027712012-10-08T12:17:13.595+02:002012-10-08T12:17:13.595+02:00Debt consists of principal and interest due. Both ...Debt consists of principal and interest due. Both are due whenever the loan/bond agreement says they are due (free negotiation between borrower/lenders).<br /><br />A loan is typically due in instalments; a bond is typically due in one bullet payment the end. A ten-year 10 BEUR loan might mean that there are 10 annual instalments/repayments of 1 BEUR each. A ten-year 10 BEUR bond might mean that the entire 10 BEUR is due in 10 years.<br /><br />A 99-year bond is due in 99 years from now (the principal of it). An Evergreen or Perpetual Bond is never due; i. e. it will never be repaid. <br /><br />Interest is typically payable annually. Thus, a 10 BEUR ten-year bond with a 10% interest rate would require 1 BEUR interest payments annually during the first 9 years and at the end of the 10th year, a total of 11 BEUR would be due (10 BEUR principal and 1 BEUR interest).<br /><br />Capitalization of interest means that the interest due is not paid in cash but, instead, added to the principal debt. In the previous example: the 1 BEUR interest due at the end of the first year would be added to the 10 BEUR of debt. For the second year, the debt would be 11 BEUR and the interest 1,1 BEUR, again added to principal at the end of the second year. And so forth.<br /><br />The interest expense in the budget is limited to the mount of interest paid in cash. When the 1 BEUR interest is actually paid annually, every year 1 BEUR burden the budget as an expense. When that interest is capitalized, no interest expense flows through the budget during the first 9 years. Should the total accrued interest be paid after 10 years, a huge amount of expense would go through the budget then. But, typically, one would refinance a large part of the interest due with a new bond.<br /><br />In once wrote this post about it.<br /><br />http://klauskastner.blogspot.gr/2011/12/bond-financing-versus-loan-financing.html<br /><br />kleinguthttps://www.blogger.com/profile/12491174042954678023noreply@blogger.comtag:blogger.com,1999:blog-5882645467378797266.post-81261565323261010562012-10-07T23:46:39.063+02:002012-10-07T23:46:39.063+02:00Hi, I really like your post but can you please exp...Hi, I really like your post but can you please explain more about how the capitalization would work in practice? And at what point in the future would the debt be paid? Thank youAnonymousnoreply@blogger.com