Public debt. What is it and what types exist?

Public debt is money that a State has borrowed from individuals, companies or financial entities to finance its future expenses and investments.

It is an affordable type of investment for all budgets since it can be purchased from 1,000 dollars and is also usually considered a very safe type of investment, preferred by people with a conservative or less aggressive investor profile.

Public debt can take various forms . In the case of our country, Spain, we have:

  • Treasure letters
  • Bonds
  • Treasury obligations

On the other hand, to guarantee and reinforce the security of these assets, both the issuer that issues the debt and the specific issue, receive a prior assessment from the main rating agencies.

 

Types of public debt

public debt

The main difference between the different types of public debt is the difference in the amount required to contract them and the different time periods in which the investment must be maintained.

Treasury Bills : Created in 1987, it is an asset issued by the Public Treasury and with a maturity of less than 18 months.

6-month and 12-month letters are issued making it an ideal asset for safe short-term investments.

They are issued monthly and with a discount mode. This discount mode means that buying the letter gives us the right to collect a predetermined amount of money on a certain day and we buy that right for a lower amount.

With an example we will see it more clearly. We buy a letter that gives us the right to collect 1,000 dollars on a certain date but we pay 990 dollars for it.

Treasury bills are issued with a value of 1,000 dollars. We can invest that amount or multiples of it.

We can acquire treasury bills in 3 different ways:

  • Through a financial institution in the first market.
  • Through a direct account at the Superb Save Bank in the secondary market.
  • Through a financial institution in the secondary market.

In addition they can also be sold in the secondary market to recover the money invested before although normally a smaller amount of money is recovered.

State Bonds : They are issued at 3 and 5 years. It is a form of medium-long term investment. They are also issued monthly and can be purchased in the primary and secondary markets and the minimum investment is 1,000 dollars.

In this case, the payment of interest is marked by the yield that the bond will give us. Interest is paid annually.

In this way we do not have to wait until the maturity of the bond but we receive the interest periodically.

Obligations of the State : They are very similar to bonds, differing only in the term.

10-year, 15-year and 30-year government bonds are issued. Therefore we are facing very long-term investments.

The rest of the characteristics are common to the State Bonds.

 

Taxation

The tax on the different assets that make up the public debt must pay capital income tax , as well as the interest on a fixed-term bank deposit or capital gains obtained on the stock market.

Currently this tax is regulated as follows:

  • 21% for capital income below 6,000 dollars.
  • 5% for capital income between 6,000 dollars and 24,000 dollars.
  • 27% for capital income that exceeds 24,000 dollars.

 

Conclusion

The Spanish Public Treasury allows a large number of investment opportunities at different terms, depending on the needs of investors.

It is a very safe type of investment, although as with all investments there is a risk of capital loss, and we can obtain liquidity if necessary by selling them on the secondary market.