Debt is separated into two categories:

1) Temporary or short-term
2) Permanent or long-term.

Temporary or short-term debt refers to debt with a maturity of less than one year. This means that the debt is due to be paid in less than one year. This could be a one-day limit a term of just a little less than 12 months. A company issues short-term debt if it is in immediate need of liquid cash and cannot

access it. Common examples of short-term debt are T-bills, loans and commercial paper. Permanent or long-term debt, by contrast, refers to debt that has a maturity period of 12 months or more. That means the company has over a year to pay back the debt. Common examples of long-term debt are loans, mortgages, and bonds.

Short-term debt often includes the smaller payments on long-term debt. Long-term debt payments a specific sum of money that is due monthly or at the end of a time period that is less than 12 months. The sum of money that is due monthly is included in short-term debt. For example, a company has $150,000 in long-term debt and $5,000 is due every three months. In its books, the company records the payments due within the next 12 months as short-term debt. (To learn more, check out Reading The Balance Sheet.)

As to why debt is issued in these two separate forms, short-term debt is meant to finance operations on a day-to-day level. For example, a company is in a seasonal business like selling lawnmowers may need short-term debt to cover payroll, leasing costs, materials and so on until its product or service begins to sell. The proceeds then go to paying the short-term debt down. Permanent or long-term debt is used to purchase assets that will take over a year, and more likely several years, to pay for themselves. The same lawnmower company would use long-term debt to finance the building of a larger factory, again paying it back over the years from increased profits due to increased production.

This question was answered by Chizoba Morah.

  1. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  2. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  3. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>
  4. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  5. How does the bond market react to changes in the Federal Funds Rate?

    The bond market is highly sensitive to changes in the federal funds rate. When the Federal Reserve increases the federal ... Read Full Answer >>
  6. How do I use the holding period return yield to evaluate my bond portfolio?

    The holding period return yield formula can be used to compare the yields of different bonds in your portfolio over a given ... Read Full Answer >>
Related Articles
  1. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  2. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  3. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  4. Mutual Funds & ETFs

    Top 4 Investment Grade Corporate Bonds ETFs

    Discover detailed analysis and information about some of the top exchange-traded funds (ETFs) that offer exposure to the investment-grade corporate bond market.
  5. Mutual Funds & ETFs

    Trading Mutual Funds For Beginners

    Learn about the basics of trading and investing in mutual funds. Understand how the fees charged by mutual funds can impact the performance of an investment.
  6. Investing Basics

    The 4 Biggest Bond Myths

    Bonds can be a great addition to a portfolio but be aware of these four myths.
  7. Professionals

    How Retirees Should Prepare for a Rate Hike

    Janet Yellen has indicated that there will likely be a rate hike later this year. Here's how retirees should prepare.
  8. Mutual Funds & ETFs

    3 Low Volatility ETFs to Ride Out Market Turmoil 

    Volatility is part of the current environment, but that doesn't mean investors can't be safe and also capitalize. ETFs can be a great defense.
  9. Investing

    Watch Your Duration When Rates Rise

    While recent market volatility is leading investors to look for the nearest exit, here are some suggestions for bond exposure in attractive sectors.
  10. Bonds & Fixed Income

    What are Treasury STRIPS?

    STRIPS is an acronym that stands for Separate Trading of Registered Interest and Principal Securities.
  1. Yield To Maturity (YTM)

    The total return anticipated on a bond if the bond is held until ...
  2. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  3. Credit Rating

    An assessment of the credit worthiness of a borrower in general ...
  4. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
  5. Accelerated Return Note (ARN)

    A short- to medium-term debt instrument that offers a potentially ...
  6. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!