Introduction to Bonds Payable

What you will learn to do: demonstrate an understanding of bonds payable

A corporate bond is issued by a corporation seeking to raise money in order to expand the business. The term corporate bond is usually applied to longer-term debt instruments with a maturity date falling at least a year after the issue date. (The term commercial paper is sometimes used for instruments with a shorter maturity period. ) Sometimes, corporate bond is used in reference to all bonds with the exception of those issued by governments in their own currencies. Strictly speaking, however, the term only applies to bonds issued by corporations.

Corporate Bond: A corporate bond is issued by a corporation seeking to raise money in order to expand its business.

Corporate bonds are often listed on major exchanges (and known as listed bonds) and ECNs, and the coupon (i.e., the interest payment) is usually taxable. Sometimes, the coupon can be zero with a high redemption value. However, though many are listed on exchanges, the vast majority of corporate bonds in developed markets are traded in decentralized, dealer-based, over-the-counter markets.

In contrast to long-term notes, which usually mature in 10 years or less, bond maturities often run for 20 years or more.

Generally, a bond issue consists of a large number of $1,000 bonds rather than one large bond. For example, a company seeking to borrow $100,000 would issue one hundred $1,000 bonds rather than one $100,000 bond. This practice enables investors with less cash to invest to purchase some of the bonds.

Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder. The borrower promises to pay (1) the face value or principal amount of the bond on a specific maturity date in the future and (2) periodic interest at a specified rate on face value at stated dates, usually semiannually, until the maturity date.

Large companies often have numerous long-term notes and bond issues outstanding at any one time. The various issues generally have different stated interest rates and mature at different points in the future. Companies present this information in the footnotes to their financial statements. Promissory notes, debenture bonds, and foreign bonds are shown with their amounts, maturity dates, and interest rates.

From a company’s point of view, the bond or debenture falls under the liabilities section of the balance sheet under the heading of Debt. A bond is similar to the loan in many aspects however it differs mainly with respect to its tradability. A bond is usually tradable and can change many hands before it matures; while a loan usually is not traded or transferred freely.