(i) Refunding: Refunding is the process by which the government raises new bonds to pay off the maturing bonds. Thus, the government takes a fresh loan to repay an old loan. In this case, the money burden of the debt is not liquidated but is postponed to some future date. Hence, the total burden of the debt continues to accumulate. Usually, this method is adopted when the government is not in a position to repay its outstanding loans at present.
(ii) Debt Conversion: Conversion of public debt means exchange of new debt for the old debt. In this method, the loan is actually not repaid, but the form of debt is changed. The process of conversion consists of converting a high-interest debt into a low-interest debt. The government might have borrowed at a time when the rate of interest was high. But if the market rate of interest falls, it may convert old high into rest loan into a new low-interest loan. The government is able to reduce the burden of debt thereby. This is possible only when the government enjoys good credit worthiness.
