ACCA Financial Management (F9) Certification Practice Exam

What type of financing involves raising funds through long-term, fixed-rate instruments that pay interest?

1. Venture capital

2. Short-term loans

3. Long-term debt capital

4. Trade credit

The correct answer is: Long-term debt capital

The type of financing that involves raising funds through long-term, fixed-rate instruments that pay interest is long-term debt capital. This method allows businesses to secure funds for significant periods, often ranging from several years to decades, and the obligations are typically structured to pay a fixed interest rate. This means that the borrowing costs remain predictable over the life of the loan, which can aid in financial planning and budgeting for the organization. Long-term debt capital is commonly raised through instruments such as bonds or debentures, where the issuing entity commits to making regular interest payments to investors until the principal amount is repaid at maturity. This type of financing is particularly advantageous for funding large projects, expanding operations, or refinancing existing debt, as it does not require immediate repayment of the principal and can provide a stable source of financing over time. In contrast to venture capital, which typically involves equity financing with higher returns expected, and short-term loans that are usually intended for immediate funding needs, long-term debt capital is focused on long-lasting financial commitments. Trade credit, as another alternative, involves purchasing goods and services with delayed payment but does not qualify as a long-term fixed-rate financing instrument.