Question

Name and define in short answers the various types of debt (advantages and disadvantages and whether they are short term or long term)

Answer 1

Bonds are long-term debt. Advantages are cheap source of capital (compared to equity), and tax shield on interest payments. Disadvantages are higher leverage and obligation of periodic interest payments

Mortgage loan is long-term debt. Advantages are cheap source of capital (compared to equity), and tax shield on interest payments. Disadvantages are higher leverage and obligation of periodic interest payments

Accounts payable are short-term debt. Advantages are that it is a source of working capital, and cash discounts can be availed for quick payments. Disadvantages are that payment terms can be strict.

Notes payable are short-term debt. Advantages are that they are a source of short-term financing without the formalities and procedures involved in a bank loan or a bond issue. Disadvantages are that they have to be strictly repaid within the time period to avoid penalties and reputation loss

Bank overdraft is short-term debt. Advantages are that it is an arrangement with a bank where the overdraft amount is fixed and can availed readily at any time. Disadvantage is that interest rates on bank overdrafts are quite high.