Week 3 exercises - Essay Example

A long term liability is one that has to be repaid in more than 1 year. These include bonds, long term loans, debentures and other similar long term debts that the company takes from others and the repayment schedule is more than one year. A bond is a debt instrument which is used to borrow money. The organization in need of money issues bonds (the issuer); the lender who pays money to obtain bond is called bond holder. The bond holder gets interest payments on the bond at future dates. The principal is paid at future date also.

The period of the bond is predefined and is called maturity. A bond is different than stock as the bond holder does not assume any ownership right on the company as compared to stock holders unless it is a convertible bond. Bond is an example of long term liabilities. A secured bond is one that has physical backing of an asset to ensure that bond holder’s capital is safe even if the issuer defaults on payments. This provides assurance to the lenders that their capital will be returned in case of any mishap to issuer organization.

Some examples of secured bonds include mortgage bonds (which are backed by real estate) and equipment trust certificate (which are secured through company equipment). An unsecured bond, on the other hand, is one that is not backed by any security or collateral. In case of default, the bond holder would lose the invested funds and will have no recourse. As it is apparent, the risk in unsecured bonds is higher; but then these are issued at higher interest rates to attract investors. Unsecured bonds issued by government do not carry high interest rates.

This is because these bonds are backed by the government and thus the risk of failure is quite low. A convertible bond is one that can be converted into common shares or cash, at a predefined rate. Convertible bond is a semi-debt, semi-equity like