What is Long-Term Debt?

1961 reads · Last updated: December 5, 2024

Long-term debt is debt that matures in more than one year. Long-term debt can be viewed from two perspectives: financial statement reporting by the issuer and financial investing. In financial statement reporting, companies must record long-term debt issuance and all of its associated payment obligations on its financial statements. On the flip side, investing in long-term debt includes putting money into debt investments with maturities of more than one year.

Definition

Long-term debt refers to debt with a maturity period exceeding one year. This type of debt can be viewed from both the issuer's and the financial investor's perspectives. In financial statements, companies must record the issuance of long-term debt and all related repayment obligations. Investing in long-term debt involves putting funds into debt investments with a maturity period of more than one year.

Origin

The concept of long-term debt developed alongside the evolution of modern financial markets. Initially, debt financing focused on short-term borrowing, but as the demand for long-term capital by businesses and governments increased, long-term debt became an important financing tool. In the early 20th century, with the maturation of capital markets, the issuance and trading of long-term debt became more common.

Categories and Features

Long-term debt can be categorized into corporate bonds, government bonds, and bank loans. Corporate bonds are typically issued by companies to finance long-term projects; government bonds are issued by national or local governments for public project financing; bank loans are long-term funds borrowed by companies from banks. Key features of long-term debt include a longer maturity period, fixed or variable interest rates, and higher credit risk.

Case Studies

A typical example is Apple Inc.'s issuance of $17 billion in long-term bonds in 2013, which was the largest corporate bond issuance in the U.S. at that time. Apple used these funds for stock buybacks and dividend payments. Another example is the U.S. government's issuance of long-term treasury bonds to fund infrastructure projects and other long-term initiatives, which are generally considered low-risk investments.

Common Issues

Investors in long-term debt may face interest rate risk and credit risk. Rising interest rates can lead to a decline in bond prices, and deterioration in the issuer's creditworthiness can lead to default. Additionally, investors often misunderstand the liquidity of long-term debt, assuming it can be easily liquidated, whereas in reality, long-term debt typically has lower liquidity.

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