Conversion:

Conversion is also considered as another method of debt redemption. Governments occasionally use this method when they have an immediate obligation to pay the old debts and when resources are not readily available. Under such circumstances the government issues conversion loans or fresh bonds to the existing bondholders. In fact, this is not exactly debt redemption  and does not lead to any reduction in the total debt obligation of the government. But if the government manages the fresh loans at lower interest rates, servicing burden of public debt will decline. Government generally try to convert their high cost loans with low rates of interest when the rate of interest is falling. Such an arrangement will minimize the burden on the government though there is no change in the debt stock of the government as such. According to Hugh Dalton conversion method does not really reduce the debt burden as reduction in interest rates reduces the ability of the bondholders to pay taxes resulting in loss of government revenues thereby reducing the capacity of government to redeem or repay the loans. A successful use of this method ensures efficient management of public debt.

Here, it is necessary to note that the methods of refunding and conversion are often used interchangeably . Refunding is the postponement of debt payment while conversion is the change or rearrangement of interest rates and other terms of the debt except the postponement of debt maturities. Often, both the methods can be used in a combined way.