Consider the following statements regarding Sovereign Bonds:

1. A sovereign bond is a specific debt instrument issued by the government in both foreign and domestic currency.
2. The yield of the sovereign bond is the interest rate that the government pays on issuing bonds.
3. The central banks also control the supply of money within the economy by the use of these bonds.

Which of the above statements is/are correct?

Question

Consider the following statements regarding Sovereign Bonds:

1. A sovereign bond is a specific debt instrument issued by the government in both foreign and domestic currency.

2. The yield of the sovereign bond is the interest rate that the government pays on issuing bonds.

3. The central banks also control the supply of money within the economy by the use of these bonds.

Which of the above statements is/are correct?

Quintessence Classes · Accepted Answer

The correct answer is 1, 2 and 3. Here is the conceptual breakdown for each statement:Statement 1 is correct: A sovereign bond is a debt security issued by a national government to finance its spending. These can be denominated in both the domestic currency (e.g., Rupee-denominated G-Secs) or in foreign currencies (e.g., Eurobonds or Dollar-denominated bonds) to attract international investors.Statement 2 is correct: The yield represents the effective interest rate or the return an investor realizes on a bond. While the "coupon rate" is fixed at issuance, the yield fluctuates based on the bond's market price, reflecting the actual cost of borrowing for the government at any given time.Statement 3 is correct: Central banks (like the RBI) use these bonds as a primary tool for Open Market Operations (OMO). By purchasing bonds, the central bank injects liquidity (money) into the economy; by selling bonds, it absorbs excess liquidity to control inflation and manage the money supply.

Answer

1 and 2

Answer

1 and 3

Answer

2 and 3

Answer & Explanation

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JKPSC JKAS 2022 Prelims

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