What is Bonds Payable?
Bonds Payable are the long term debt issued by the company with the promise to pay the interest due and principal at the specified time as decided between the parties and is the liability, bond payable account is credited in the books of accounts of the company with the corresponding debit to cash account on the date of issue of the bonds.
Bonds Payable word can be broken into two parts – bonds and payable. As you can understand, bonds are debt. And payable means you are yet to pay that amount. So bonds payable stands for debt that’s not being paid.
To be more specific, bonds payable is a long-term debt that has remained outstanding.
As we note from above, Durect Corp had Bonds payables in its current liability as well as long-term liability sections.
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How does Bonds Payable Work?
A company issues IOU (“I owe you”. An IOU is a signed document acknowledging a debt. The investors buy this issued IOU in lieu of cash. In simple terms, the company is borrowing money from the investors by issuing them a legal document that states that the investors would get paid the full amount with interest in due time.
Two things that we need to pay heed to do in the case of bonds payable –
- First, once the company issues bonds to the investors, the company needs to pay the interest to the bond-holders semi-annually (or every six months). The rate of interest would be decided beforehand, and the company needs to pay the pre-determined amount as the interest charges.
- Second, the company also needs to ensure that it pays off the full amount at the time of maturity.
Bonds Payable Example
Below is an example of Nike’s Bond of $1 bn and $500 million that were issued in 2016.
We note the following about Nike’s Bond.
- Par value – The amount of money that is paid to the bondholders at maturity. It generally represents the amount of money borrowed by the bond issuer. Bond is issued in the denomination of $1000.
- Coupon – Coupon payments represent the periodic interest payments from the bond issuer to the bondholder. The annual coupon payment is calculated by multiplying the coupon rate by the bond’s face value. As we note from above, Nike’s bond pays interest semiannually; generally, one half of the annual coupon is paid to the bondholders every six months.
- Coupon rate – The coupon rate, which is generally fixed, determines the periodic coupon or interest payments. It is expressed as a percentage of the bond’s face value. It also represents the interest cost of the bond to the issuer. The coupon rate is 2.375% in the case of a $1 billion offer.
- Maturity – Maturity represents the date on which the bond matures, i.e., the date on which the face value is repaid. The last coupon payment is also paid on the maturity date. The maturity date is 11/1/2026
Bonds Payable Video
This article has been a guide to what is Bonds payable and its definition. Here we discuss how Bonds payable work along with practical examples including that of Nike. You may also have read through the following recommended articles –