Bonds Payable

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 – bondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually.read more 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 liabilityCurrent LiabilityCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more as well as long-term liability sections.

bonds-payable

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For eg:
Source: Bonds Payable (wallstreetmojo.com)

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.

Nike Bonds payable

source: sec.gov

We note the following about Nike’s Bond.

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 –