Short- term finance is generally borrowings that repayable within ONE year;
Medium- term finance are those repayable within 2 to 5 years and
Long-term finance repayable after more than 5 years
This 3rd part article seeks to look at Long term sources of fund which include the following:
Share capital (covered in Part 2 of 3)
Fixed Income Securities
Notes and
Bonds
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FIXED INCOME SECURITIES:
The holders of the fixed income securities are creditors of the company rather than shareholders: Have no rights in the company beyond the payment of a fixed interest on their loans and repayment of the loans in accordance with the terms on which they were issued. Fixed income securities may be secured or unsecured, with the secured fixed income securities ranking before the unsecured.
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The two (2) principal types of fixed income securities are debentures and loan stocks. |
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DEBENTURES/DEBENTURE STOCKS |
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A debenture is similar to a mortgage; |
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It is a long-term loan secured on certain fixed or floating assets of a company; |
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A debenture stock is a debenture issued as a fixed-interest stock; |
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Such securities are issued under trust deeds, and in the event of the borrower defaulting on the interest or capital repayment, the debenture holder has the right to appoint a receiver to sell the company’s assets and secure repayment of the loan; |
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LOAN STOCKS |
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A loan stock is a security issued by a company in respect of a loan made by investors; |
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Loan stocks may be secured, unsecured, convertible or non-convertible, but are often unsecured, unlike debentures; |
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Unsecured loan stocks carry higher risk than debentures, and in the event of a winding-up, unsecured loan stock holders rank alongside all other unsecured creditors.
Convertible loan stocks carry the right to convert into ordinary shares of the company on pre-arranged terms and within a limited period. The objective of issuing a convertible loan stock is to obtain fixed interest finance at a relatively low rate of interest and at the same time make it attractive to potential holders by the offer of equity participation at a later date. |
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NOTES |
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These are also fixed income securities with a maturity date, and may or may not be redeemable. |
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BONDS |
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Like debentures, bonds are fixed income securities issued to lenders of long-term loans, and with a maturity date. |