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What Are Debentures, Mortgages And Long Term Loans?

563 words - 3 pages

Debentures, Mortgages and Long-Term LoansAs 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稭ortgages稬ong-term loansDebenturesA 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 ...view middle of the document...

MortgagesA 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 will then own it, and can sell it to get their money back. Any surplus would of course be returned to the firm.The rate of interest may be fixed for a period or it may vary with market rates of interest.Long-term loansOther long-term loans may, unlike the mortgages, be unsecured loans. This means that the bank or financial institution that lent the money does not have any title over any of the firms assets, and they would have to go through the courts to get any money back. This can prove to be a lengthy and expensive process. An unsecured loan will therefore tend to attract a higher rate of interest then a secured one where the lender is more certain of recovering their money in the event of a problem.All these long-term liabilities will be shown on a balance sheet and subtracted off the net current assets to give the net assets. They may alternatively be shown as a part of the firm's source of funds in the bottom half of the balance sheet. Where they are shown is simply an accounting convention and does not alter their meaning at all.

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