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Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)
Long-term debt consisting of
probably future sacrifices of economic benefits arising from present obligations
that are not payable within the operating cycle of the business, or within
a year if there are several operating cycles within one year.
Examples of fixed liabilities, or long-term liabilities, include
bonds payable, long-term notes payable, mortgages payable, pension obligations,
and lease obligations. Long-term
debt represents a somewhat permanent method of financing growth and is
often used to increase earnings whenever a larger rate of return can be
earned on the borrowed funds than is paid out of after-tax interest (leverage).
Typically, long-term creditors have no vote in management matters
and receive a stated rate of interest.
A distinction is usually made between long-term debt and equity
financing. A debt instrument
typically has a maturity date for the face value (principal amount) to
be repaid to the lender.
Long-term debt is
often subject to covenants or restrictions for the protection of lenders.
Bond indentures and note agreements are often used to reflect these
covenants or restrictions.
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