Bonds Payable

Bonds are a form of long-term debt and might be referred to as a debt security.

Bonds allow corporations to use financial leverage or to trade on equity. The reason is that a corporation issuing bonds can control larger amounts of assets without increasing its common stock.

Bonds that mature on a single maturity date are known as term bonds. Bonds that mature over a series of dates are serial bonds.

Bonds that have specific assets pledged as collateral are secured bonds. An example of a secured bond would be a mortgage bond that has a lien on real estate.

Bonds that do not have specific collateral and instead rely on the corporation’s general financial position are referred to as unsecured bonds or debentures.

Convertible bonds allow the bondholder to exchange the bond for a specified number of shares of common stock. Most bonds are not convertible bonds.

Some bonds require the issuing corporation to deposit money into an account that is restricted for the payment of the bonds’ maturity amount. The restricted account is Bond Sinking Fund and it is reported in the long-term investment section of the balance sheet.

Callable bonds are bonds that give the issuing corporation the right to repurchase its bonds by paying the bondholders the bonds’ face amount plus an additional amount known as the call premium. The call premium might be one year of additional interest. A bond’s call price and other conditions can be found in a bond’s contract known as the indenture.

Many years ago corporate bonds could be unregistered. Such bonds were known as bearer bonds and the bonds had coupons attached that the bearer would “clip” and deposit at the bearer’s bank. Today, corporations do not issue bearer bonds. Instead, they issue registered bonds.

There are various fees that a corporation must pay when issuing bonds. These fees include payments to attorneys, accounting firms, and securities consultants. These costs are referred to as issue costs. Issue costs are likely to be recorded in the account Bond Issue Costs. This account appears on the balance sheet under the heading of Other Assets or Deferred Charges. Over the life of the bonds the balance in the long term asset account Bond Issue Costs will be amortized to expense.

When bond interest rates are discussed, the term basis point is often used. A basis point is 1/100th of one percentage point. For example, if a market interest rate increases from 6.25% to 6.50%, the rate is said to have increased by 25 basis points.

Because the material covered here is considered an introduction to this topic, many complexities have been omitted. You should always consult with an accounting professional for assistance with your own specific circumstances.

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