The Chinese Inflation, 1937-1949

By Shun-Hsin Chou | Go to book overview

Appendix 3 Effects of Inflation on Government Debt in Foreign Currencies

The purpose of this appendix is to show the condition under which the cost of servicing a foreign-currency bond in a given period may exceed the cumulative receipts derived from the bond up to the end of that particular period. For the purpose of this discussion, we assume that both the purchase and servicing of the bond are made in local currency on the basis of the prevailing exchange rates. It is further assumed that the bond is sold by the Central Bank only at the beginning of each year, that the bond matures at the end of n years from the time when it was first issued, that the repayment of its principal in a given year amounts to

of the outstanding balance, and that an interest at the rate of i percent on the outstanding balance is paid at the end of each year. The exchange rate is denoted by r and the period is denoted by t (= 1, 2, 3, . . . , T . . . n). The period under consideration is T. The amount of principal (in units of foreign currency) of the bond sold is P. The weighted average of time periods elapsed between the receipt of principal and the end of period T is

.The weighted average of the exchange rates at which the

bonds were sold is

. The receipts derived from and the payments made on the bond for various periods are shown in Table 3.

The payment for servicing the bond in a given period (or year) T exceeds (or fall short of) the cumulative receipts derived from that bond through period T, if

; or ,

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