In addition to my comment below, the following are financially equivalent [I simplify a bit]:
1. Give 80 cents on the dollar to each depositor and say tough-luck.
2. Give $1 dollar to each depositor upon bond maturity [for sake of example let's say 10 years].
Option 1: Depositor takes the cash, buys a new bond with the same maturity [but it would have higher yield, say closer to 4%] at current market price. At maturity they have $1 dollar
Options 1 and 2 are equivalent, minus the bid-ask spreads which are very tight for treasuries. This is time value of money.
1. Give 80 cents on the dollar to each depositor and say tough-luck. 2. Give $1 dollar to each depositor upon bond maturity [for sake of example let's say 10 years].
Option 1: Depositor takes the cash, buys a new bond with the same maturity [but it would have higher yield, say closer to 4%] at current market price. At maturity they have $1 dollar
Options 1 and 2 are equivalent, minus the bid-ask spreads which are very tight for treasuries. This is time value of money.