A:

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.

RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. What is the relationship between current yield and yield to maturity (YTM)?

    Both the current yield and yield to maturity (YTM) formulas are methods of calculating the yield of a bond. However, these ... Read Full Answer >>
  5. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  6. How can I use the holding period return yield to determine whether or not I should ...

    Use the holding period return yield formula to determine whether the time is right to sell your bond. With this calculation, ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares National AMT-Free Muni Bond

    Take an in-depth look at the iShares National AMT-Free Municipal Bond ETF, a highly diverse and very popular muni bond fund.
  2. Investing News

    Fund Firm Jolts: Pimco's Isn't The First Or Worst

    When you business is built on prudence and trust, a lot can go wrong to cost you tons of clients and assets. Here are a few examples.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  4. Investing Basics

    What is a Settlement Date?

    A settlement date is the day a security trade must be settled.
  5. Investing Basics

    Explaining Financial Assets

    A financial asset is intangible property that represents a claim on ownership of an entity or contractual rights to future payments.
  6. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Agency Bond

    Find out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
  8. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Hi Yld Bd

    Find out about the SPDR Barclays Short Term High Yield Bond ETF, and explore detailed analysis of the fund that tracks short-term, high-yield corporate bonds.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Short Term Corp Bd

    Learn about the SPDR Barclays Short-Term Corporate Bond ETF, and explore detailed analysis of the exchange-traded fund tracking U.S. short-term corporate bonds.
RELATED TERMS
  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!