long-term debt

Long-term debt refers to financial obligations that a company expects to repay over a period of 15 years or more. This type of financing is distinct from short-term debt, which is repaid within weeks or months.12

Forms of Long-Term Debt

• Bonds: These are promissory notes that obligate a firm to pay interest at specific times. Secured bondholders have a prior claim on the company's assets if it goes out of business.3
• Mortgage Bonds: These are secured by a lien on fixed assets like plant and equipment.45
• Debentures: These bonds are not secured by specific assets but are accepted by investors due to the company's strong credit standing.45
• Subordinated Debentures: These are secondary in claim to other debentures and short-term bank loans in the event of liquidation.45

Companies often use long-term debt during periods of stable sales and earnings, large profit margins, and when they have a low debt ratio. While leverage from debt can increase returns for owners, it also raises fixed costs and increases the fluctuation in equity returns.453