Debentures, Mortgages and Long-Term Loans
As we saw from the explanation of long-term liabilities, they are liabilities that the firm has which are due in over a year. There are various possibilities for this:-
A debenture is a form of borrowing by a firm. It may issue debentures of a fixed value - say Ã¯Â¿Â½00 or Ã¯Â¿Â½00 - at a certain rate of interest. These debentures may be bought by individuals or by financial institutions. The debentures will have a fixed time period, after which they will be paid back. This may be 5 or 10 years or in some cases even longer. In some cases they carry perks with them. Much of the new number 1 court at Wimbledon was funded by issuing debentures in return for which people get preferential deals on tickets.
They are often attractive because they tend to be a secure investment, and because the interest will have to be paid, whatever the level of profit.
This makes them less risky than ordinary shares. For the firm they can be a good way of raising money because they are predictable. It can plan ahead the cash requirement for paying the interest, and knows exactly when they will have to be redeemed.
A mortgage is also a form of long-term loan. However, it will usually tend to be on property or some other fixed asset. It will be what is known as a secured loan. This means that the loan is secured to the asset it was borrowed for. If the money was borrowed, for example, to finance the purchase of a plot of land and the firm fails to make the required loan payments, then the lender can start legal proceedings to repossess the asset. This means that they...