Lesson 7 of 18
A firm may choose to purchase outright a long-lived asset, such as an airplane or an office building, giving the firm full benefit and risk from asset ownership; however it may also enter into a lease agreement with another firm, to lease an asset and assume partial benefit and risk associated with the asset.
A Lease represents a contractual agreement between the party owning the asset who wants to earn a return on its investment (the “Lessor”) and the party desiring to use the asset (the “Lessee”). The lessor grants the lessee the right to use the asset in exchange for a series of lease payments. The lessee expects that it will earn a return on the use of the asset that is greater than the cost of the lease. In many respects, this transaction is similar to a company purchasing an asset and financing the purchase with the issuance of a bond.
Lessee is the “borrower” of the leased asset. Lessor is the “lender” of the leased asset.