What are the four sources of long-term debt financing?
A FHA-insured mortgages, public taxable bonds, stock issuances, and conventional mortgage financing
B Internally generated funds, tax-exempt revenue bonds, public taxable bonds, and private loans
C Tax-exempt revenue bonds, FHA-insured mortgages, public taxable bonds, and conventional mortgage financing
D Tax-exempt revenue bonds, government grants, stock issuances, and bank loans
The correct answer and explanation is:
The correct answer is C: Tax-exempt revenue bonds, FHA-insured mortgages, public taxable bonds, and conventional mortgage financing.
Explanation:
Long-term debt financing is a method used by organizations to raise funds with the commitment to pay back the borrowed amount over an extended period, often more than one year. There are several types of long-term debt financing that businesses or governmental entities can utilize, and each comes with its own features and terms. The four main sources of long-term debt financing are:
- Tax-exempt revenue bonds: These are bonds issued by governmental entities such as states or municipalities. The interest income on these bonds is exempt from federal taxes, and in some cases, state and local taxes as well. This makes them an attractive option for investors, particularly those in high tax brackets. These bonds are typically used to finance public infrastructure projects or facilities that generate revenue, such as toll roads or hospitals.
- FHA-insured mortgages: These are long-term loans that are insured by the Federal Housing Administration (FHA). FHA-insured mortgages are typically used to finance the purchase of homes by individuals who may have less-than-perfect credit. The FHA guarantees the loan to lenders, making it less risky for lenders to offer mortgages to borrowers who might otherwise be unable to secure a loan.
- Public taxable bonds: These bonds are issued by corporations or government entities and are subject to taxation. Unlike tax-exempt bonds, public taxable bonds require the issuer to pay interest, which is subject to federal and state income taxes. These bonds are often used by private companies and municipalities when they need capital for projects but do not qualify for tax-exempt status.
- Conventional mortgage financing: This refers to standard loans provided by banks or other financial institutions to finance the purchase of property or real estate. Conventional mortgages typically have fixed terms and interest rates, and the loans are not insured or guaranteed by any government agency. These loans are commonly used for buying homes or commercial properties.
These four sources of long-term debt financing are commonly utilized for their relative stability and ability to raise large amounts of capital, making them integral to funding significant projects or acquisitions.