Explain Long Term Undertakings of Fixed Capital Nature

The long term undertakings of a fixed capital nature of issuers are what give rise to the issue of bonds. Many companies and governments and public enterprises (also called parastatals) have a requirement for long-term funds to finance projects such as infrastructure (roads, telecommunications systems, deep mining, etc). The financial planning side of a long-term project would be problematical if the company was only able to issue short term instruments (like commercial paper or CP). There would be two main financial considerations (and inconveniences) in this regard:

  • The uncertainty of obtaining the funds at each rollover at maturity.
  • The uncertainty of the rate of interest to be paid at each rollover date.

The ability to issue long-term bonds removes these uncertainties. The issuer has a fixed rate that is paid at known intervals and the funds are available for the full long term period.