What are bonds payable?

Bonds payable are a form of long term debt. Bonds are issued by corporations, hospitals, and governments. For example, public utilities will issue bonds to help finance a new electric power plant, hospitals issue bonds for new buildings, and governments issue bonds to finance projects, cover deficits, or to pay for older debt that is now maturing.

The issuer of bonds makes formal promises to pay interest usually every six months (semiannually) and to pay the principal or maturity amount at a specified date many years in the future. The agreement covering the details of the bonds payable is known as the bond's indenture.

U. S. corporations issue bonds and other long term debt instead of common stock because 1) it is less costly than issuing common stock, 2) the interest it pays to the bondholders is deductible for income tax purposes, and 3) the bondholders are not owners and therefore the present ownership interest is not diluted.

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