Corporate bonds are a common method for companies to arrange capital for their business operations. Many investors around the world purchase bonds from large corporations against capital which the company returns with some interest (Lasker, 2021). However, there is a certain risk in this type of investment and the most prominent is the risk of the interest rate change. Whenever the interest rate changes, it decreases the value of the bond. Similarly, sometimes, the companies become unable to pay the specified money against bonds to the purchasers even when they have reached their maturity (Lasker, 2021).
Therefore, the long-term bonds are more sensitive to such changes in the interest rate and thus have a greater risk for the lenders (GALLANT, 2019). Moreover, the probability of interest rate changes is also higher for long-term bonds. However, long-term loans provide a great sum of money in one go to support a particular financing activity with a low interest rate to be paid back in a longer period of time as compared to a short term loan.
Nestle’s long term debt and assets ratio in the last quarter of 2020 is 0.23 which shows the company is largely dependent on the debts. Therefore, to further sustain the business operations, it is recommended to use short term loans as they are flexible and can be easily managed in the long run. It also makes the company adjust their financial capital according to the needs of the market and the overall economic situation of the country.
References
GALLANT, C. (2019). Interest Rate Risk Between Long-Term and Short-Term Bonds. Investopedia. https://www.investopedia.com/ask/answers/05/ltbondrisk.asp
Lasker, R. (2021). What Are the Risks of Investing in Corporate Bonds? The Balance. https://www.thebalance.com/the-risks-of-corporate-bonds-417101
