ACCA Financial Management (F9) Certification Practice Exam

What describes a situation where a company pays interest every year indefinitely without redeeming the loan?

1. Perpetual loan structure

2. Long-term borrowing strategy

3. Bond issuance

4. Short-term financing

The correct answer is: Perpetual loan structure

A perpetual loan structure is characterized by a situation where a company continuously pays interest on its debt but does not repay the principal amount. This type of borrowing arrangement allows the company to maintain a constant cash outflow related to interest payments without the obligation to redeem the loan at a specified maturity date. This structure is particularly beneficial for companies that want to maintain liquidity while having access to long-term financing without the pressure of repaying the principal. It allows the company to utilize funds for operations or investments without losing capital that would otherwise be tied up in debt repayment. In contrast, long-term borrowing strategies typically involve a commitment for the principal to be repaid after a set period, which differentiates it from a perpetual structure. Bond issuance usually refers to the process of raising capital through the sale of bonds which may or may not be perpetual, depending on the terms of the bonds. Short-term financing is relevant to borrowing that is typically due within a single operating cycle or a year, making it inherently different from a perpetual obligation.