Long-term debt instruments are loans with a maturity of at least one year; however, some investors refer to long term as securities with term times longer than 10 years. Creditors sell debt instruments on the secondary investment market and on most types of debt, the creditors receive regular interest payments, as well as a return of principal at maturity.
Types of Long-term Debt
National governments issue long-term debt securities in the form of bonds with term times lasting between 10 and 30 years. Municipal governments and corporations also sell long-term bonds although most have maximum terms of 10 or 15 years. Financial institutions sell debt in the form of certificates of deposit but most CDs have term times of less than a year, therefore, very few are classified as long-term debt securities.
Buying Debt From The Issuer
When you buy debt from the issuer you can either buy it at par value or at a discount. If you buy a debt at par value, you receive interest payments at least once every six months. If you buy debt at a discount, you normally pay 50 percent of the par value and receive no interest payments during the term, however, you will receive the par value when you eventually redeem the debt. Series EE savings bonds are a type of debt bought at below par value although unlike most government bonds, you cannot sell EE bonds to other investors.
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Most long-term debt instruments are marketable -- which means you can sell the debt to other investors -- but as with the sale of any security you must negotiate a sale price. If interest rates have risen since you bought a bond, you may have to sell it at a discount to attract any bids. If interest rates paid on bonds have fallen since you bought the debt, investors might agree to pay a premium to buy your bond since it pays a higher return than newly issued debt.
Long-term debt instruments expose creditors and investors to two main risks: interest rate risk and default risk. Most long-term debt instruments involve the debtor paying a fixed interest rate. As inflation takes a hold of the economy, prices rise but your income from the debt remains the same which means you lose spending power. Additionally, default risk refers to the danger of the debtor becoming insolvent and failing to make regular debt payments. If this occurs you could also end up losing your original principal payment. Long-term debts are therefore riskier than short-term debts because the time frames involved increases the likelihood of default. However, yields paid are also much higher than on short-term debt to mitigate this risk.