Certified Financial Management Specialist Practice Exam

In financial terms, what does public debt typically involve?

1. Loans made by individuals to banks

2. Borrowing by governments to fund ongoing expenses

3. Investment strategies managed by firms

4. Products offered by financial intermediaries

The correct answer is: Borrowing by governments to fund ongoing expenses

Public debt primarily refers to the obligations incurred by governments through borrowing, which they undertake to finance ongoing expenses, such as infrastructure, education, and social programs. When a government issues bonds or takes loans, it raises capital that is typically used to cover budget deficits or to invest in projects that promote economic growth. This borrowing is essential for governments to maintain operations, pay employees, and fulfill other financial commitments, especially when tax revenues are insufficient. The other options do not accurately capture the essence of public debt. Loans made by individuals to banks primarily pertain to personal or commercial borrowing, which is more about private financing rather than governmental obligations. Investment strategies managed by firms involve asset management and portfolio diversification, which are focused on generating returns for investors rather than addressing government financing needs. Products offered by financial intermediaries refer to financial services and investment products aimed at individuals and businesses, rather than the borrowing strategies employed by governments. This reinforces the understanding that public debt is a specific financial mechanism used by governments to manage their financing needs effectively.