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:-
稤ebentures
ç¨Âortgages
稬ong-term loans
Debentures
A debenture is a form of borrowing by a firm. It may issue debentures of a fixed value - say �00 or �00 - 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.
English: Metropolitan Life Bldg., Manhattan, New Y...
Loans
LoanThis 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.
Mortgages
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...