Bonds Payable

Bonds payable is a liability account that contains the amount owed to bond holders by the issuer. This account typically appears within the long-term liabilities section of the balance sheet, since bonds typically mature in more than one year. If they mature within one year, then the line item instead appears within the current liabilities section of the balance sheet.

Bonds payable are recorded when a company issues bonds to generate cash. As a bond issuer, the company is a borrower. As such, the act of issuing the bond creates a liability. Thus, bonds payable appear on the liability side of the company’s balance sheet. Generally, bonds payable fall in the non-current class of liabilities.

Terms of bonds payable are contained within a bond indenture agreement, which states the face amount of the bonds, the interest rate to be paid to bond holders, special repayment terms, and any covenants imposed on the issuing entity.

The carrying value is found through the following formula:

Carrying Value = Bonds Payable + Unamortized Premium/Discount

An entity is more likely to incur a bonds payable obligation when long-term interest rates are low, so that it can lock in a low cost of funds for a prolonged period of time. Conversely, this form of financing is less commonly used when interest rates spike. Bonds are typically issued by larger corporations and governments.

Important Terms

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.

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.

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.

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.