What characterizes short-term debt?

What characterizes short-term debt?

• A. Debt with no interest
• B. Debt with a maturity of one year or less
• C. Debt that cannot be refinanced
• D. Debt always secured by collateral

Answer: (B)

Short-term debt is characterized by having a maturity of one year or less. This classification is important because it differentiates it from long-term debt, which typically has a maturity extending beyond one year. Short-term debt can include instruments such as lines of credit, short-term loans, and commercial paper. Understanding this characteristic is vital for municipalities and businesses as they manage their cash flow and funding needs. Short-term financing is often used to cover immediate operational expenses or to bridge cash flow gaps, making it a critical tool for effective financial management. The other options do not correctly define short-term debt. For instance, while some short-term debts may be interest-free, this is not a defining characteristic of all short-term debt. Additionally, the ability to refinance short-term debt varies depending on the specific terms and agreements, and not all short-term debt is secured by collateral.

Short-term debt is characterized by having a maturity of one year or less. This classification is important because it differentiates it from long-term debt, which typically has a maturity extending beyond one year. Short-term debt can include instruments such as lines of credit, short-term loans, and commercial paper.

Understanding this characteristic is vital for municipalities and businesses as they manage their cash flow and funding needs. Short-term financing is often used to cover immediate operational expenses or to bridge cash flow gaps, making it a critical tool for effective financial management.

The other options do not correctly define short-term debt. For instance, while some short-term debts may be interest-free, this is not a defining characteristic of all short-term debt. Additionally, the ability to refinance short-term debt varies depending on the specific terms and agreements, and not all short-term debt is secured by collateral.