CAT / FIA FFA Syllabus D. Recording Transactions And Events - Loan notes. - Notes ^{5 / 14}

Loan Notes

Limited liability companies may issue loan stock or bonds to raise finance. These are non-current liabilities but are different from share capital

1. Shareholders are the owners of a company, while providers of loan capital are creditors of the company.

2. Shareholders receive dividends whereas loan holders are entitled to a fixed rate of interest every year. This interest is an expense in the statement of profit or loss and is calculated on the par value, regardless of its market value.

3. Loan holders have to be paid interest when due. Otherwise, they can take legal action against the company if their interest is not paid. Therefore, loan stock is generally less risky than shares.